By Zacks Equity Research35 minutes ago

Yahoo Inc.’s (YHOO) shares increased 5.6% to settle at $41.81 after the Chinese e-Commerce giant, Alibaba, set a price range for its Initial Public Offering (IPO) with the U.S. Securities and Exchange Commission (SEC.TO).

Founded in 1999, Alibaba is primarily owned by Yahoo! Inc., Japan’s Softbank Corp. as well as other founders and senior managers. Per Alibaba’s most recent filing with the SEC, it will price its shares on Sep 18 and begin trading on Sep 19. It will offer 320.1 million American depositary shares at a price between $60 and $66 per share. At this price band, Alibaba would be valued at about $160 billion at the mid-point of the range, making it the largest U.S. IPO ever.

Also, Alibaba’s IPO filing showed that Yahoo! plans to reduce its stake to 16.3% from 22.4%, following the offering. The company plans to sell 121.7 million Alibaba shares in the upcoming IPO and retain 401.8 million. Currently, Yahoo! is valued at about $41 billion. At the mid-point of the pricing range of $60-$66, its total stake in Alibaba is worth about $33 billion, which translates to about $33 per Yahoo share.

Yesterday’s price increase reflects that investors are hopeful about the upcoming IPO and expect Yahoo!’s Alibaba stake to be worth more than anticipated. At the stated IPO price band, Yahoo!, which has been struggling for years, will likely generate $7.3 to $8 billion by selling 121.7 million of its Alibaba shares.

Yahoo!’s CEO Marissa Mayer may consider reinvesting the proceeds to get the core business into a decent shape. In our view, bringing new product focus to the company through acquisitions as well as returning value to investors, either as dividends or share repurchases would be beneficial for the company. We believe that prudent usage of the cash received could revive core revenue growth and narrow the ever-widening gap between Yahoo and its main competitors, Facebook (FB) and Google (GOOGL).

CEO Mayer looks forward to reaping profits when Alibaba is available for trading. As analysts commend the terrific numbers reported by Alibaba-specific business, investors are already stocking up Yahoo! shares in hopes of gaining from the IPO.

Yahoo shares carry a Zacks Rank #5 (Strong Sell). Another stock in the same sector that has been performing well is Baidu (BIDU), sporting a Zacks Rank #1 (Strong Buy).

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