Summary

• Yahoo is expected to receive approximately $10 billion from the IPO raise, while it will also retain 16.3% ownership, or $22.1 billion in the Chinese B2B ecommerce giant.
• Assuming the IPO prices at $60 to $66 per share, the lower range means that a Yahoo shareholder could afford to buy two Alibaba shares for every three Yahoo shares.
• Yahoo shares would realistically rally to a fraction of Alibaba’s advance. This makes ditching Yahoo for Alibaba IPO more profitable.

Yahoo’s (NASDAQ:YHOO ) ownership in Alibaba presents an interesting scenario. Last year, Alibaba announced its plans to list in the U.S and in the process, created one of the biggest IPO stories to date. Since then, shares of Yahoo have responded in kind rallying to new highs since its fall from grace. As of this writing, Yahoo is trading just short of $40 per share.

There have been moments when the shares of Yahoo slipped, but the general trend has been impressive. For instance, after missing Q2 analyst estimates, Yahoo plunged 5.3% to $33.21 from $35.60. However, the shares are now trading just shy of the $40 level.

This is the closest it has come towards breaching the $40 level since trading at about $41 per share early in the year. Generally, Yahoo has been reasonably volatile over the last two quarters, with some analysts questioning the company’s valuation, minus Alibaba.

Alibaba Values IPO At $60 To $66 Per American Depository Share

Yahoo is currently valued at $39.38 billion (market capitalization) while its book value stands at just over $12 billion. Alibaba (Pending:BABA ) on the other hand, is set to list on NYSE next week, with trading slated for September 18/19. According to several reports, Alibaba is expected to price its IPO at $60 to $66 per American Depository Share.

Based on this pricing, Bloomberg Calculates that Alibaba would raise $21.1 billion from the public offering. This would also put the company’s valuation at about $162.7 billion. Yahoo is expected to receive approximately $10 billion from the IPO raise, while it will also retain 16.3% ownership in the Chinese B2B ecommerce giant. The 16.3% ownership would represent $22.1 billion.

This means that based on Yahoo’s current market value, more than 50% would still be tied to Alibaba. Currently, Yahoo has 24% stake in Alibaba. which equates to a value of $39 billion, which means Yahoo’s organic business has a relative valuation of close to nothing.

This means that when Yahoo received the big paycheck after the Alibaba IPO raise, the future of the company’s organic business will rest upon how well it reinvests the money. Since CEO Marissa Meyer took over, the company has made dozens of acquisitions, the highlight of them being the $1.1 billion purchase of Tumblr.

Many still wonder how Tumblr is going to help Yahoo back on its feet, but according to recent developments, the company is now trying to monetize Tumblr after introducing Yahoo Finance Blogs where contributors and market experts contribute analysis and opinions on stocks and the general market.

While the idea behind the acquisitions appears to be clear and sound, implementation has often proved otherwise, and now, it would be interesting to see how the $10 billion goes into Yahoo’s books in the coming quarters.

So, Should you ditch Yahoo for Alibaba IPO?

Currently, shareholders of Yahoo are generally Alibaba stockholders, which means it is more like Alibaba domiciled and listed in the U.S in the form of Yahoo. This means that organically, the shareholders of the California-based internet information provider are more of Alibaba shareholders than they are Yahoo shareholders.

However, when the big cheque comes, if the company does not give a part of it to shareholders (via share buybacks, then the money has to be invested well to boost Yahoo’s organic business). Ideally, shareholders of Yahoo could end up losing a lot in returns if the money isn’t spend well.

As highlighted earlier, the ownership in Alibaba would be down to about $22 billion, that’s assuming zero movement in the IPO share price after listing (though highly unlikely). Another unlikely situation is that shares of Alibaba plunge post-listing (but cannot be ruled out after Facebook disappointed two years ago following a hyped campaign). Nonetheless, the most anticipated situation is that shares of Alibaba will go on a rally after trading begins in about two weeks from now.

This means that with your reduced stake in Alibaba (via Yahoo ownership) you are likely to miss out on a very compelling opportunity. Alibaba is the biggest e-commerce company in Asia, and continues to expand while it remains miles off potential based on China’s massive internet users (approximately 700 million of whom Alibaba believes more than 300 million shop online). Alibaba, currently has just 231 million active customers, and continues to expand its global presence.

Their listings in the U.S will not only open doors for U.S investors to own Alibaba, but it also opens doors for U.S clients to use more of its services. Note that, Alibaba’s business-to-business (B2B) online portal brings together Chinese manufacturers and foreign buyers from more than 240 countries, including the U.S. Therefore listing in the U.S is bound to increase awareness of the company’s services, thereby increasing revenue potential.

Why You should ditch Yahoo for Alibaba IPO

Assuming that the IPO is price at $60 to $66 per share, the lower range means that a Yahoo shareholder could afford to buy two Alibaba shares for every three Yahoo shares held. For the upper range, the investor would have to add $0.30 for the same multiple. Hypothetically, an investor holding 1500 Yahoo shares could possibly acquire 1000 Alibaba shares during the IPO.

Now, note that, with Yahoo having already received its check of about $10 billion, any upward movement by Alibaba shares would have a lesser effect on Yahoo shares than before. For instance, if Alibaba shares were to go in a rally to trade at about $100 per share, then this would mean a return of about 60%-67%.

However, for a shareholder who maintained his ownership in Yahoo, then only his indirect ownership in Alibaba via Yahoo would grow by that much. With the $10 billion remaining unchanged unless invested (hopefully wisely), Yahoo shares would realistically rally to a fraction of Alibaba’s advance. This makes ditching Yahoo for Alibaba IPO more profitable.

Conclusion

As pointed out, it is not a certainty that shares of Alibaba would go on a rally after listing, but looking at the company’s overall business performance over the last fiscal year, this somewhat appears to boost outlook, especially considering the company’s expansion potential.

The company’s average deals per user increased significantly to 49 deals in 2013, from 39 deals in 2012 and 33 deals in 2011. This boosted the number of deals executed in 2013 to 11.3 billion, which consequently generated a whopping $248 billion in sales.

The company is also increasing penetration in mobile. Alibaba believes that 7.9 percent of China’s total consumption is transacted via online deals, and with approximately 500 million accessing internet via mobile devices, Alibaba wants to make sure it taps into this expansive sea of technology users, that thrives in making thinks simple.

The bottom line is that Yahoo shareholders may want to access their positions and the opportunity presented by Alibaba IPO in the coming weeks, because they have a chance to either own a direct stake in the company that they have held indirect stake since they bought shares of Yahoo, at reasonable price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.