Yahoo Inc. made a bundle on Alibaba Group Holding Ltd.'s IPO, the biggest-ever, last week. Now comes the Monday hangover: Two big investment banks downgraded Yahoo stock, sending shares down more than 5 percent.
Prior to Alibaba's IPO, investors looking to take a stake in the fast-growing Chinese e-commerce firm could buy Yahoo, which owned 22 percent of the company through an investment it made in the mid-2000s.
But two things happened Friday: First, Alibaba went public, so investors wanting exposure to Alibaba simply bought BABA, as the the company is now known by its ticker. Second, Yahoo sold 19 percent of its Alibaba holdings, and while that netted the company $8.3 billion, it leaves Yahoo with a little less Alibaba, and thus less reason to buy Yahoo stock.
With the Alibaba catalyst gone, Bank of America/Merrill Lynch downgraded the stock from "buy" to "neutral" early Monday. Analyst Justin Post said Yahoo is no longer the best way to own Alibaba, but he raised his price target to $46 from $40, reflecting the value of Yahoo's stake, which remains substantial. Yahoo still owns 404 million shares, which currently is worth $36 billion.
Carlos Kirjner of Bernstein Research cut his rating to "market perform" from "outperform" but also raised his price target to $42 on the belief Yahoo management will use the funds from the Alibaba IPO to buy back shares.
“We believe that to buy Yahoo at $40 per share or more, one has to believe that management can and will transfer to shareholders the value of the remaining Alibaba stake tax-efficiently or that Yahoo will be an acquisition target," he wrote, according to Barrons.
Pivotal Research's Brian Wieser reiterated his $41 price target on the belief CEO Marissa Mayer will use some of the Alibaba proceeds -- $6 billion after taxes -- to make ad tech acquisitions.
"Advertising-related acquisitions seem -- or should be -- all but inevitable given the company’s current traction within the advertising community," he wrote. "In our view the best option for Yahoo would be to focus on ad tech companies with strong -- and retainable -- management teams."