The investment-management vestige of the old Yahoo!, now known as Altaba (NASDAQ: AABA), just reported its results for the first quarter of 2018. As a reminder, all of Yahoo!’s actual operations now belong under the Verizon umbrella, leaving Altaba to manage a portfolio of investments and intellectual property rights that Verizon didn’t want to include in its $4.5 billion buyout offer.
Chiefly, Altaba owns 14.7% of China-based e-commerce giant Alibaba (NYSE: BABA) and a 35% stake in former subsidiary Yahoo Japan, an online search and marketing service in the land of the rising sun. How have these core investments treated Altaba since February’s fourth-quarter update?
Let’s have a look.
By the numbers Investment Fair Value as of March 31, 2018 Fair Value as of December 31, 2017
Alibaba $70.4 billion $66.1 billion 6.5%
Yahoo Japan $9.4 billion $9.3 billion 1%
Total Altaba Investments$87.9 billion $81.1 billion 8.4%
Data source: Altaba SEC filings.
What the numbers mean
80% of Altaba’s total investment portfolio consists of Alibaba shares, up from 78% at the end of 2017, and that has been a solid investment recently. Alibaba’s stock has gained 23% since Altaba was formed, and Altaba shares followed along with a 26% gain. Over the same period, Yahoo Japan’s stock fell 11% lower while the S&P 500 market barometer gained 11%.
Beyond the two flagship holdings, Altaba holds $3.1 billion of corporate bonds, $1.1 billion in certificates of deposit, and another $2.2 billion in an assortment of smaller investments. The Excalibur IP operation, which holds the licensing rights to Yahoo!’s portfolio of technology patents, did not move over to Verizon and accounts for $640 million of Altaba’s asset value today.
The company continues to reshape this part of its portfolio. The bond balance is up from from $2.8 billion at the end of December, reversing a rash of bond sales during the fourth quarter. The portfolio of certificates of deposit rose by a rounding error over the last three months, and other investments have decreased from $1.4 billion three months earlier.
Altaba still hasn’t bought or sold a single share of Alibaba or Yahoo! Japan since breaking free from the Yahoo/Verizon merger.
Altaba’s board of directors authorized a new share buyback program in February, replacing an exhausted $5 billion policy with another $5 billion buyback deal. Through April 20, Altaba had used the new program to retire 7 million shares in open market trades totaling roughly $1.1 billion, leaving another $3.9 billion of autorized share repurchases left to perform.
Altaba shares consistently trade approximately 26% below the combined value of its investment assets these days, down from the 30% discount seen in 2017. As fellow Fool Frank DiPietro explains it, the discount pricing is due to the tax costs involved in moving those international funds back to American soil. Last year’s tax reform package included some big changes to the taxation treatment of foreign profits, which includes nearly everything in Altaba’s portfolio, and that was enough to shrink the discount by a few percent. The company recorded a $6.4 billion non-cash benefit from these tax changes, which explains the narrowing of the foreign taxation discount.
In other news, activist investment firm TCI Fund Management recently called for Altaba to start liquidating its assets and return the resulting cash to shareholders. The firm, which own 9.7% of Altaba’s shares, appreciates management’s efforts to narrow the market discount but is frustrated with the particular steps Altaba is taking.
In response, Altaba stated that it is open to all options for boosting shareholder value and will maintain active communications with shareholders to achieve that goal. This quarterly update did not mention TCI Fund Management or any other activist investors by name.