Citi analyst Mark May upgraded Yahoo (YHOO) to Buy, saying the stock's risk/reward balance looks "compelling" at current levels, as he sees upside potential of 15% or more. Given Yahoo's stake in Alibaba (BABA), the analyst also sees the Chinese E-commerce giant's positive outlook as a positive for the U.S. company. Nonetheless, Yahoo's shares are sliding in morning trading on the heels of a Reuters report saying that the court decision to uphold "net neutrality" regulation may put Verizon (VZ) and AT&T's (T) buyout bids in danger.
COMPELLING RISK AND REWARD: Citi analyst Mark May upgraded Yahoo to Buy from Neutral, saying the risk/reward is more compelling at current levels, given the recent "credible" news reports and management commentary about the auction process, Alibaba's recent positive outlook, and his valuation analysis suggesting upside potential of 15% or more. Yahoo's stock at current levels implies a 30%-35% discount to the underlying market values for the company's stakes in Alibaba and Yahoo Japan (YAHOY) as well as a $2B-$4B value for Yahoo, May told investors. He sees upside from here driven by the sale/monetization of Yahoo's core operations for more than the $2B-$4B implied price and a reduction in the "conglomerate discount" as the company simplifies its corporate structure. The analyst raised his price target on Yahoo's shares to $43 from $38.
RULING COULD HINDER PURSUIT: A U.S. appeals court decision upholding government rules that would place new restrictions on how internet providers collect user data could hinder Verizon and AT&T's pursuit of Yahoo's digital assets, Reuters reported, citing analysts. Verizon and AT&T are primarily interested in Yahoo's advertising technology tools that leverage user data to deliver targeted ads, the publication said, adding that a part of the new rules could limit customer data collection and usage to boost ad revenue.
ALIBABA INVESTOR DAY: UBS analyst Erica Poon Werkun said Alibaba, in which Yahoo continues to hold a significant stake, provided insights into key strategic growth initiatives and disclosed a new framework for improved financial disclosures at its first analyst and investor day since its IPO. The analyst believes the new reporting structure provides added clarity around capital allocation, and noted that the company gave initial 2017 revenue guidance. Werkun raised her price target on Alibaba's shares to $101 from $95 and reiterated a Buy rating on the stock. JPMorgan analyst Doug Anmuth was also positive on the company after its investor day. Over the mid to longer term, the analyst sees "multiple growth opportunities" in new areas for the company, such as cloud computing and logistics. Anmuth also highlighted Alibaba's greater transparency and "solid" first quarter revenue outlook. The analyst reiterated an Overweight rating and $96 price target on the shares.
PRICE ACTION: In morning trading, shares of Yahoo have dropped nearly 2% to $36.60 despite Citi's upgrade.
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