Yahoo's core business has been eroding. It's lost ground in display advertising and in online search, and the Wall Street consensus is that its revenue declined last year.
When Marissa Mayer, Yahoo's chief executive, unceremoniously dumped Henrique de Castro, her top lieutenant, on Wednesday, it was an acknowledgment that she had so far failed to turn the company around.
But no matter: Wall Street greeted the news of de Castro's dismissal with a shrug. Regardless of what Mayer does, the stock market loves Yahoo. Its shares doubled in value last year, outstripping the performance of highflying rivals like Google, AOL and Facebook. How is this feat even remotely possible?
Yahoo's lofty valuation makes sense only if you put its US business aside and think of the company as an investment in Asia. That's the way Wall Street sees it. From this perspective, most of Yahoo's value is found in Japan and, especially, in China, where it has a large stake in the Internet colossus Alibaba.
"In the United States, they are doing the best they can, and I think Marissa Mayer is doing a fine job, but their core business is challenged, to be polite, and it will likely remain that way for some time," said Victor Anthony, managing director for Internet media at Topeka Capital Markets. "For Yahoo, it's all about Asia."
Yahoo's 24 per cent stake in Alibaba, which has been described as a combination of Amazon, eBay and PayPal, with a bit of Google thrown in, accounts for the bulk of the US company's value, Anthony calculates. In the US, Yahoo trades at about $40, and he says he believes that at that price, it still has plenty of room to run.
"I think Yahoo's worth $50 to $52 a share," he said, "but that's not because of its American operations."
In his estimation, Yahoo's US core, damaged by sliding advertising revenue and diminished profit margins, is worth only $10 a share.
On the other hand, its holdings of Alibaba, which is planning an initial public offering that has Wall Street drooling, are worth $30 a share, he said. While that figure is subject to debate, no one questions that it is sizable: Alibaba plays a gargantuan role in China's Internet economy. This online retailer's two main shopping sites handled roughly $160 billion in merchandise in 2012, more than eBay and Amazon combined. Analysts estimate that its eventual IPO could value it at $130