What has been the most significant Yahoo stock price driver will no longer be a factor for YHOO's share price come 2016.
You see, by the end of the year, Yahoo! Inc. (Nasdaq: YHOO) will separate out its 15% stake in Alibaba Group Holding Ltd. (NYSE: BABA).
This sounds dire for the struggling online company. After all, Yahoo stock has risen as much as 200% since Marissa Mayer stepped in as CEO and the Alibaba stake came more into focus. This meteoric rise more than anything represented investor interest in Yahoo's large position in what could be one of today's most promising growth markets: Chinese e-commerce.
But post-spin-off, Yahoo will not be valueless. We took a closer look at what's behind Yahoo's stock price today and saw there's more to it than just Alibaba.
Here's what will help YHOO shares continue to grow...
A Deeper Look at the Current Yahoo Stock Price
A simple sum-of-the-parts valuation of Yahoo shows how much Alibaba factors in to YHOO's share price. And it shows Yahoo's core business - selling ads against searches and its content - isn't getting much respect from the market.
Yahoo's current market cap is around $41.9 billion. Of that, the Alibaba stake is worth around $32.3 billion. When divided by Yahoo's outstanding shares, $34.51 of the current $44.78 Yahoo stock price is tied up in Alibaba.
This means the market prices Yahoo stock without Alibaba at $10.27. But this still falls short of valuing Yahoo's core business.
That's because Yahoo also holds a 35% stake in Yahoo! Japan.
Those 2 billion shares are worth about $8.9 billion. That includes a currency conversion from yen to the dollar.
Now for the true value of the Yahoo stock price emerges, and it's not pretty...
Yahoo! Japan in this case accounts for $9.45 of the current Yahoo stock price.
That means the market values Yahoo on its own at $770.5 million. At this valuation, Yahoo would trade at a dismal $0.82.
In other words, Yahoo is a small-cap penny stock. That may sound discouraging, but don't head for the exit yet.
Yahoo is a good investment now, and may very well continue to remain one once it sheds Alibaba.
Here's how the spin-off will work...
Yahoo Spin-Off Will Reveal True Value of Yahoo! Japan
Post-spinoff, Yahoo will be two companies.
One of which will be the Alibaba stake, with a small legacy business attached. The other will be the traditional search and display segment.
Current Yahoo shareholders will receive stock in the new spun-off Alibaba investment house proportional to their current holdings.
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Therefore, the Alibaba stake will be given a chance to move in price without being tethered to Yahoo. And likewise, the market will be able to price Yahoo independent of Alibaba.
But Yahoo announced no plans to spin-off Yahoo! Japan - despite the recommendations of some activist investors.
And that's why, absent Alibaba, Yahoo stock still provides an intriguing investment opportunity.
At worst, Yahoo is worthless on its own. At best, it's a distant, unexciting third name in a sector dominated by Google and Facebook.
But Yahoo! Japan isn't the same case.
In owning Yahoo shares post-spinoff, you won't just be holding Yahoo's beleaguered search and display business. You'll be holding Japan's equivalent of Google.
Yahoo! Japan is actually the largest web property in Japan, according to Trefis.
Now, Yahoo! Japan isn't crushing Google in Japan. At least not in the same way Google is crushing Yahoo almost everywhere else. But it is encouraging to see Yahoo! Japan hold even a slim lead in Japan when it can't compete elsewhere across the globe.
And Yahoo! Japan has had a pretty solid financial track record. In 2014, revenue grew by 8.3% to 418.5 billion yen ($3.5 billion). Income grew by 5.5% to 132 billion yen ($1.1 billion).
And Yahoo! Japan just announced that it expects to double its dividend by the end of March. The dividend will grow from 4.43 yen ($0.04) to 8.86 yen ($0.07) a share. These dividend payments would equate to $141.5 million per year for Yahoo.
Yahoo! Japan is going to be adversely affected by the weakening yen. But at the same time Yahoo's Chief Financial Officer Ken Goldman has made good use of foreign currency derivative instruments to hedge against these fluctuations. In 2014, Yahoo made $254 million by hedging its currency risks.
Yahoo may not be exciting on its own. But buying now will give investors a chance to hold two valuable companies. One in Alibaba, the best play on the promising e-commerce growth in China. And the other one is a play on the largest web property in Japan.
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