Much has been made of Yahoo’s (YHOO) increasing sprawl, as it swallows startup after startup. Sure enough, in a Tuesday call with investors, Chief Executive Marissa Mayer said Yahoo had made eight new acquisitions in the last quarter alone. But what Yahoo’s latest financial numbers really highlighted was how much the company is running two completely separate businesses: It is simultaneously a consumer Internet company struggling to eke out a living from ad revenue and a large stockholder in Alibaba, the Chinese e-commerce darling that is twice as profitable as Facebook (FB).
The latter part of the business is clearly pulling the former along. Here’s how to think about it: Yahoo has a stock market value of $34.1 billion, and owns a 24 percent stake in Alibaba. Estimates for the current value of Alibaba, which is planning an IPO, range between $75 billion and $125 billion. If it comes in at the low end of that range, Yahoo’s stake would be worth $18 billion, or just over half of Yahoo’s total market value. At the high end, Yahoo’s stake in Alibaba would be worth $30 billion—which would imply that the rest of Yahoo’s enterprise is worth as little as $4 billion, or 12 percent of its current value.
Yahoo’s investment dates from a 2005 deal when it paid $1 billion for a 40 percent share in Alibaba, back when the Chinese e-commerce business was eager for capital and know-how. Their roles have reversed. Now Alibaba would be happy to be rid of its California hanger-on, which doesn’t bring much to the table anymore. Their arrangement now requires Yahoo to dump a big portion of its stake in Alibaba once it goes public.
Mayer has made it a point to improve this relationship, and she seems to be succeeding. On Tuesday she said that Yahoo would be required to sell only 208 million Alibaba shares when it goes public, down from 261.5 million under their previous agreement. This could mean that Yahoo will get a significantly bigger benefit from any bounce in Alibaba’s value.
Mayer is arguing that the rest of the business is heading in the right direction, too. Yahoo has reversed a decline in the number of people who use its services, and it now has 800 million monthly visitors to its core services, which don’t include Tumblr. It also has a new logo and a really nice-looking weather app.
This isn’t entirely convincing. Yahoo is struggling to turn those users into dollars. Emarketer says that Yahoo will claim 7.7 percent of the total online ad market this year, down from 8.6 percent in 2012. The firm also says that 2013 is probably the last year that Yahoo will be ahead of Facebook in digital advertising. Yahoo says this will take time. “The advertising revenue will start to follow that traffic trend. It’s difficult to say when,” Mayer told investors.
Mayer needs to keep investors patient. Her ability to smooth things over with Alibaba seems to be buying her the time to keep snapping up startups until she finds the ones that will get that other part of Yahoo’s business rolling.