Yahoo Stock Has More Upside Despite China Challenges, Analyst Says

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Yahoo CEO Marissa Mayer

The stock has outperformed the market this year, but investors worry that an economic slowdown in China will affect the value of e-commerce firm Alibaba, in which Yahoo has a stake.

Yahoo shares outperformed the broader stock market during the first half of 2013, rising 26.3 percent, compared with a 12.6 percent gain in the broad-based S&P 500 index.

But despite this outperformance and recent investor concerns tied to China's economy, Barclays Capital analyst Anthony DiClemente on Monday reiterated his "overweight" rating and $29 price target on the Internet stock, which would account for 14 percent upside.

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The China concerns relate to bigger financial trends that could drag down the valuation of Chinese e-commerce giant Alibaba Group, in which Yahoo owns a 24 percent stake.

"Shares have pulled back recently owing to concerns that a potential credit crunch and macroeconomic slowdown in China could have a negative impact on Alibaba's valuation," DiClemente argued in a report entitled, "Reasons to Stay the Course." "We recognize that Chinese macro concerns may pose a headwind for Yahoo going forward, but we still consider shares compelling at current levels."

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He cited "multiple positive catalysts" for the Internet company led by CEO Marissa Mayer. For example, accelerating revenue and operating cash flow growth could drive up Yahoo's stock price multiple as "investors are ascribing minimal value to core Yahoo," according to DiClemente.

"The growing value of Alibaba has been the largest driver of Yahoo's outperformance in our view, and is largely priced in at this point," he also wrote. "Given Chinese macro concerns, we believe [Wall Street] buy-side consensus for Alibaba has recently declined slightly to between $65 billion and $80 billion. We believe there is some counter-cyclicality to Alibaba's business model, however, as e-commerce is often perceived as a discount channel."

Yahoo acquired a stake of about 40 percent in Alibaba in 2005 for $1 billion and ownership of Yahoo’s Chinese operations.

Alibaba Group Holding Ltd posted a 171.1 percent jump in net profit in the fourth quarter, as its revenue rose 84 percent, according to a regulatory filing by major shareholder Yahoo, Inc.

For the fiscal year ending Sept. 30, Alibaba reported a 78 percent revenue increase to $4.1 billion, as earnings jumped 81 percent to $484.5 million.

Twitter: @georgszalai