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© 2000

Yahoo!'s Finance: Whither the Net's Floundering Flagship?
By Andrew Goodman, October 13, 2000

We're loath to get caught up in the tech-press-as-financial-analysis frenzy, but Traffick would be remiss if it didn't weigh in as Yahoo! (YHOO) shares have sunk well below their 52-week low, freefalling as much as 21% to $65 3/8 at the close of trading today. At this writing on Wednesday evening, the stock is down even further in after hours trading.

All this after beating EPS estimates and coming in with higher-than-expected revenues. The company earned 13 cents for the quarter, but reported concerns over the vulnerabilities of the dot-com companies which advertise with Yahoo!. Yahoo! currently derives 80% of its revenues from its online advertising.

A few factors to keep in mind:

  • The total market capitalization of Yahoo! is still near $35 billion, which is to say, higher than many major automakers and diversified telecommunications and media conglomerates. It may sink further, therefore, but in the long run will return to its old highs, if the company makes the right moves.
  • Yahoo! is still 18-24 months away from getting its trailing P/E down to an almost conservative-looking 100. Yahoo! shares are currently trading at a gaudy 260 times earnings. Lehman Brothers just commented that "the stock looks rich at 36X '01 revenues," and that's tough to dispute. As Yahoo!'s growth continues, the situation will take care of itself, but for now, sentiment in the market won't tolerate those kinds of numbers for a company which derives 40% of its advertising revenues from "pure dot com plays."
  • Being well into the black, there is no risk in the form of a pressing need for financing.
  • In this industry, scale works. Yahoo! is uniquely positioned to leverage its existing assets to generate more page views, more transactions, etc. etc. without incurring massive staffing or infrastructure costs.
  • Growth is still rapid; revenues are up 90% over the same period last year.
  • Many revenue streams have yet to come on-stream.
  • Most competitors have been vanquished, with only MSN and AOL still in the same space. Yahoo! actually has the advantage over AOL of not relying on monthly subscription fees for dialup Internet service - a service which is rapidly becoming a nearly-worthless commodity. And it doesn't need to incur massive debt to build the infrastructure needed to offer clients fast internet connections, etc., since Yahoo! isn't in the Internet Service Provider business.
  • Consumers actually use and like Yahoo! You can't buy goodwill like this.
  • In terms of the sheer quality and consistent integration of portal features, Yahoo! is nearly always #1, and when it isn't, it's #2.
  • Yahoo! could have pumped up its revenue numbers through reckless, expensive marketing, but did not.
  • Speaking of marketing, many of its services, including its recent acquisition eGroups, are still undergoing viral growth. Numerous newer Yahoo! services are much more targeted and "vertical" than Yahoo! is usually given credit for.

Some things Yahoo! probably needs to do:

  • Make broadcast (i.e. the future of Yahoo! Broadcast, FinanceVision, and new topical channels) a priority. That means finding out who they need to get in bed with so that I can dial up that cherished interview, sports event, movie, interactive chat, or concert, on my television, not on my uncomfortable-to-watch computer (no matter how fast the DSL connection is). Granted, Broadcast is pretty cool already. You can add events to your calendar, and engage in chats relating to the broadcast. This Saturday night, for example, you can chat with Saturday Night Live veteran Tim "Yes-This-Character-Is-Lame-But-I-Waited-Soooo-Long-to-Cash-In" Meadows about his egregious new movie, The Ladies Man. Lowbrow or not, this is the kind of stuff that might make or break Yahoo! Those TV moguls are swimming in advertising dollars, and becoming more like them will reassure investors that Yahoo! isn't headed into some online ghetto. This lucrative broadcast field is what makes Microsoft and AOL look so strong going forward, and Yahoo! needs to become a convincing player in this regard.
  • Stop being so timid about acquisitions. (Although granted there are quite a number of investments that are easily forgotten, like Yahoo!'s stake in Net2Phone.) Lesser companies like Lycos and Go2Net have been able to use their overvalued stock to snap up good companies at fire sale prices. Although this may make them more like holding companies, it looks good on the bottom line. And it's folly to believe that any $35 billion company can be one lean, focused, machine, so a little diversification can't hurt. Unfortunately the window of opportunity has passed for using overvalued Yahoo! stock as currency. On the other hand, many good companies are in serious trouble, and a combination of cash and stock could be used to beef up Yahoo! by buying undervalued assets. I'm not suggesting Yahoo! turn into CMGI, just take a page out of Lycos' and Go2Net's book. Even a smallish company like incubates and acquires early-stage companies right and left.
  • Hope that Gore wins the election. The Democrats are high on fostering growth in Silicon Valley and like to take some credit for the new level of productivity made possible by the new economy. The Republicans' position is less clear. The GOP may favor business generally, but Democrats believe in actively subsidizing R&D and actively encouraging technology entrepreneurship. Part of the overall market malaise, especially in the tech sector, can be attributed to election-related uncertainty. In reality, the party platforms may not be all that far apart, but the perception of the markets is that an election may cause further pain for the ailing tech sector. (The Internet, for some conservatives, is a Bad Thing that needs to be Censored.) At the very least, it can be hoped that if Dubya prevails, he'll shout, "Yahoo! I won!"
  • Wait. As the old saying goes, the business cycle has not been repealed. After nearly a decade of unfettered expansion, the economy is headed for a slowdown, and in any recession or soft landing scenario, high flyers get cut down. Some for good, and some temporarily. The upswing may begin anew in 18-24 months, around the time Yahoo!'s trailing P/E finds its way into double digits.


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