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Yahoo!'s Finance: Whither the Net's Floundering
Flagship?
By Andrew Goodman, Oct. 11, 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 Internet.com
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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