(Reuters) - Yahoo Inc's plan to keep a larger-than-expected stake in e-commerce giant Alibaba after the Chinese company's IPO prompted at least seven brokerages to raise their stock price targets on the U.S. company.
Shares of Yahoo were set to open 3 percent higher after the company said it was selling less of its 24 percent stake in Alibaba Group Holding Ltd's planned initial public offering in 2014.
Analysts expect Yahoo to benefit from retaining a larger stake in Alibaba, which reported strong sales and profit growth in the second quarter.
Yahoo reported tepid profits on Tuesday, in the face of strong competition on online advertising from Facebook Inc and Google Inc.
"Yahoo continues to lose share in both display and search (advertising), but short-term, the stock should continue to benefit from Alibaba's very strong execution and prospects for a much sought-after IPO," Cantor Fitzgerald analysts wrote in a note.
The brokerage, which has a "buy" rating on Yahoo, valued the company's Asian assets, which include Alibaba and Yahoo Japan, at about $29 per share on a fully taxed bases.
That is 86 percent of Yahoo's Tuesday closing price of $33.38.
At least seven brokerages raised their price targets on Yahoo by as much as $9 to $38 a share, while two cut their targets.
"The amended sale agreement with Alibaba ... couple with our view that the IPO will price closer to our previously assigned $120 billion value (for Alibaba), leads us to see an incremental $4 value per Yahoo share," Evercore Partners analysts said.
Alibaba is preparing for an IPO that analysts expect to raise as much as $15 billion.
Yahoo, which owns 24 percent of Alibaba, cut the maximum amount it planned to sell to 40 percent of its stake from a previous sale of half.
Analysts at J.P. Morgan Securities and Cowen and Co were, however, cautious on Yahoo's core business as display advertising revenue fell 7 percent, marking the fourth consecutive quarter of year-over-year declines. The company also lowered the midpoint of its annual revenue forecast.
"While Yahoo continues to focus on improving ad inventory and optimizing pricing and sales mix, we believe there is significant work to be done to successfully compete in an increasingly competitive display environment that is shifting towards programmatic buying," J.P. Morgan analysts said.
Reporting by Soham Chatterjee; Editing by Maju Samuel