Alexander Valtsev
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Skimming Through Yahoo's Disappointing Financial Statements

As of the writing of this article, Yahoo's (YHOO) market value of equity is just below $32B (~$35.50 per share). Keep in mind this figure. So, I decided to look into the company's most recent quarterly report - only to disappoint myself. Bear with me as I go through the most concerning parts of the report.

Let us start with an overview of the company's investments:

(Source: Q3 Report)

Notice the estimated fair value of the company's investments is just above $28B. With Alibaba's stake valued at approximately $22.6B, Yahoo's market value is about 78% dependent on the value of the Chinese company. This is madness!

You don't think that Yahoo should be valued by the sum-of-the-parts method? You think that a cash flow-based valuation would yield a better results? Well, let us look a the latest Cash Flow statement:

(Source: Q3 Report)

If we adjust cash flow from operations for the ~$3.3B income tax amount related to sale of Alibaba Group ADSs, we would get a net cash outflow of (~$2.5B) for the nine months ended in September 2014. Keep in mind that the value for fiscal 2014 was ~$897M without this adjustment.

If we adjust cash flow from operations for the ~$3.3B income tax amount related to sale of Alibaba Group ADSs, we would get a net cash inflow of $790M for the nine months ended in September 2015. The last-twelve-months' figure is about ($2.4B). Compare this to a cash inflow from operations of ~$1.2B in fiscal 2013 and a cash outflow from operations of ($282M) in fiscal 2012. It is clear that Yahoo cannot generate growing (let alone sustainable) cash flows from operations. Now, what multiple would you assign to Yahoo's business based on these records? If you want to run a DCF model on Yahoo, good luck:

(Source: Q3 Report)

The company with market capitalization of almost $32B has barely generated any free cash flows, even if we adjust for the one-time tax payment on the disposition of Alibaba's shares.

Apart from Alibaba, Yahoo also owns a 35.5% stake in Yahoo Japan (YAHOY), which is currently valued at ~$24B. The company's financial results are provided below:

(Source: Q3 Report)

Doing some quick math, readers can see that Yahoo Japan is actually operating at good profit margin: around 29%. Even though earnings fell by about 11% year-over-year, YAHOY still seems to deserve its current valuation. With an LTM earnings of slightly over $1B, YAHOY is trading at a 23.0x-24.0x P/E ratio, which, although is relative high, is actually based on real business results and some solid cash flows (free cash flows of over $500M for fiscal 2015).

Now, here is a million-dollar question: what is the value of Yahoo's core business, given that its stake in Alibaba is worth over $22B, while its stake in Yahoo Japan has a market value of about $8.5B and Yahoo's market capitalization is less than $32B? I want you to give me a answer to this question (keep in mind, that taxes on potential capital gains reduce the value of stakes in these companies to Yahoo).