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Shares of Yahoo! Inc. (YHOO - Analyst Report) climbed nearly 3%, touching a high of $35.26, before closing a notch lower at $35.13, following an upgrade from neutral to overweight by the investment and asset management firm Piper Jaffray. In addition, Piper Jaffray analyst Gene Munster increased the price target on the stock to $43.00 (from $37.00).

The analyst believes that Yahoo!’s equity stake in Chinese e-commerce giant, Alibaba Group Holding is underestimated at the current price. He opines that as the time for Alibaba’s initial public offering ("IPO") comes closer, it will send Yahoo!’s shares 20% percent higher than the current levels.

Gene Munster compared Alibaba to other e-commerce companies such as Amazon.com (AMZN - Analyst Report), eBay (EBAY - Analyst Report), and China-based Internet businesses such as Baidu (BIDU - Snapshot Report) and Qihoo 360 (QIHU - Snapshot Report) and estimated that Alibaba is worth $221 billion including cash. He is optimistic that as the IPO date nears, the valuation of Alibaba will be higher, which in turn will be reflected in Yahoo! Stock prices.

In May, the Chinese e-commerce giant filed for an IPO with the U.S. Securities and Exchange Commission, which is expected to be the next major Internet IPO in the U.S. market, close to Facebook (FB - Analyst Report). Alibaba’s IPO filing showed that Yahoo holds a 22.6% stake in Alibaba and that it is expected to offload 40% of its holdings in the upcoming IPO.

Therefore, Alibaba’s impending IPO will likely have a major impact on Yahoo. The IPO deal will generate enough cash for CEO Marissa Mayer to reinvest in any new initiatives to get the core business into decent shape. Post the IPO euphoria, shareholders and investors will be focused on the core business.

Mayer could bring a new product focus to the company and spend some of the proceeds on acquisitions. She can also return some cash to investors, either as dividends or share repurchases.

There surely has been a connection between Yahoo share prices and the Alibaba IPO since rumors started in 2013. We need to wait and see whether there are further price fluctuations till Alibaba shares go public.

Yahoo! shares currently hold a Zacks Rank #4 (Sell).

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