Yahoo was handed its second price target cut in a week on Thursday as investors weighed in on whether the company can successfully pull off the proposed tax-free spinoff of its stake in China e-commerce conglomerate Alibaba Group () .
FBR analyst William Bird said in an industry research note on Thursday that his valuation assumes a full tax shield on Alibaba.
“Yahoo’s 15.5% stake in Alibaba is a key component of (Yahoo’s) valuation,” Bird said of the No. 3 U.S. Web portal that currently carries a market cap of $29.2 billion. “It is our impression that Yahoo is more likely than not to prevail in executing a tax-free spin of its Alibaba shares.”
Yahoo filed its request for a tax-free spinoff of its 384 million Alibaba shares in Q1, under current Internal Revenue Service rules.”A reverse spin could potentially offer a lower-risk, but more cumbersome, Plan B,” Bird said.
The Internal Revenue Service said in September that it won’t grant Yahoo’s request for an outright ruling saying the spinoff meets the agency’s active trade or business requirement. However, Yahoo’s legal counsel is confident that its proposal satisfies all requirements for a tax-free spin under current law, but that would only be determined after a spinoff took place.
Also of concern is that investing in Yahoo means investing in the ever-changing Asian stock market, Bird said, acknowledging the Web portal’s remaining Asia holdings.
“Yahoo hedges a portion of its currency exposure, but its notable yen exposure is significantly less than the value of its Yahoo Japan stake,” he said.
A combination of acquisitions and development of new products has “dampened Yahoo’s margins,” Bird said. With Yahoo rivals Facebook () and Google () growing their expenses by 20% or more, Bird said, “we model higher operating expenses and future margin compression” for Yahoo.
FBR maintains an outperform rating on Yahoo stock.
Worries over the tax-free spinoff also factored into MKM Partners’ decision to cut its price target on Yahoo stock to 43 from 53 on Wednesday.
The proposed tax-free spinoff of Yahoo’s remaining 384 million shares of Alibaba into a separate publicly traded firm — a deal Yahoo announced in January and expected to finalize in Q4 — is considered a must-do for Yahoo CEO Marissa Mayer. She is facing relentless calls from shareholders to shore up Yahoo’s business core and return value to shareholders.
Yahoo’s spinoff of its Alibaba stake was considered a bright spot for the company.