Is Now the Time to Be Cuckoo for Yahoo!?

Is Now the Time to Be Cuckoo for Yahoo!?

In one of the latest moves in Yahoo!'s ongoing corporate makeover, the Internet portal has announced plans to increase its share buyback program to $5 billion. The search engine has seen a steady increase in returns since CEO Marissa Mayer took the helm in July 2012; it recently reached a new 52-week high, perhaps thanks to its stake in one of the most hotly anticipated IPOs of the year: Alibaba.

There may be a lot of positive hype surrounding Yahoo! lately, but buzz does not necessarily a solid stock make. Is Yahoo! putting its money where its mouth is, or is this company merely flying further than expected on overblown market predictions?

The timing of the buyback
Generally, a company could be buying back large amounts of its own stock either in an attempt to make outstanding shares more valuable to current investors or, as Motley Fool CEO Tom Gardner explained in a recent interview, to simply balance out its stock options. The latter tends to be a less favorable option, suggesting the company is paying less attention to its current market value and focusing more on keeping its head above water.

In Yahoo!'s case, this stock buyback may come at a moment when its shares are at a reasonable price and likely to climb higher. A little more than a year into her CEO tenure, Mayer has already transformed Yahoo! from a fading relic of Web 1.0 into a promising content portal.

She's by no means out of the woods just yet. Much of her first year on the job was spent snatching up new talent and injecting life into Yahoo!'s corporate culture, at the expense of its operating margins. Mayer's next act is to use these new assets to create content that leads to monetization. If the hotly anticipated Alibaba IPO fares well, its success could provide an additional buffer into phase 2 of Mayer's plan for Web domination.

The state of Alibaba
So what exactly is going on with Alibaba anyway? The company is being hailed as China's answer to, but it actually consists of 25 different types of e-commerce marketplaces. As of Alibaba's March 2013 year-to-date findings, two of these platforms, Taobao (a consumer-to-consumer marketplace) and its business-to-consumer complement Tmall, saw gross merchandise volume of 1 trillion yuan, or $165 billion.

Yahoo! holds a huge stake in Alibaba, and that has not gone unnoticed by the search engine's shareholders. As of October, Yahoo! owns 523.6 million shares in the Chinese mecca of online marketplaces, and if Alibaba's IPO (rumored to be slated for some time in early 2014) is successful, that stake could grow in value -- and fast. The potential here is huge, and Yahoo!'s got a front-row seat for the action.

Promising or premature?
There's a long road ahead for Yahoo!, as the company tries to put its new investments and acquisitions to work into something profitable. However, it's smart for the company to have something for shareholders in the meantime -- a buyback will help make Yahoo! stock more valuable if and when its success as a Web portal starts to take off, and its hold on Alibaba offers plenty of leverage while it figures out exactly how to do just that. All may be quiet on the Yahoo! front for now, but something big could happen soon, and any investor who wants early entry to the action has an opportunity to snatch it up right now.

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Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published