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YHOOuch
On July 20th, I blogged that I was going to buy Yahoo (YHOO). I did just that and was up 15% on the trade until yesterday when Terry Semel announced that the Sept quarter is going to be at the low end of the range on revenues and earnings. The stock is back down below $26, and my 15% gain is up in smoke.
So what to do? One friend doubled down on his YHOO trade yesterday. He hasn't blogged about doing that so I won't link to him. Another friend is taking a wait and see approach.
I did some digging around yesterday and from what I hear, the display ad market is healthy for everyone I checked in with. Search seems to be doing fine too.
Saul Hansell's article in today's NY Times has a number of good quotes, most of which indicate to me that the online ad market is healthy and doing well.
I suspect it's an issue of being overly agressive in forecasting. As Dave Moore of 24/7 Real Media says in Saul's article:
Mr. Moore said it was possible that Yahoo, in its race to compete with Google, was simply overoptimistic in its forecasts and too eager to appeal to investors. “You are expected to grow every quarter,” he said. “There is a law of large numbers. It just gets tougher and tougher to please the Street.”
Wall Street is a game of expectations. But I prefer to look at the facts. If Yahoo! does come in at the low end of the range, they'll have revenues of $1.1bn and operating cash flow of $450mm this quarter. That's an annualized rate of $4.5bn of revenue and almost $2bn of cash flow. At its current market cap of $35bn, that's 17.5x cash flow, not taking into account its balance sheet and its ownership in Yahoo Japan which is a significant asset. And cash flow is growing at 15% year over year.
News Corp has annual cash flow of $3.8bn, which is growing at less than 10% year over year, and trades at 16x cash flow.
So I think Yahoo! is fairly valued, and possibly cheap, at $25/share. I am going to join my friend and buy some more.
PS - Thanks to Drew for the title of this post. That was the subject line of his email to me yesterday when the news hit.
September 20, 2006 stocks , Venture Capital and Technology | Comments (13)
Comments
It is obvious that Internet stocks are at best marking time.
It is video - that I have been discussing that is leading - webx, adbe, apple, and even handhelds like rimm and mot.
Telecom as well is a video play in a way because of broadband. Those stocks have been hitting highs as well.
Been posting on these themes a lot lately
Posted by: howard Lindzon | Sep 20, 2006 10:20:59 AM
Hi Fred,
After your recent post about your email reading habit, i am pretty sure that you read comments here more then you read your email.
So can you please read an email titled "Enterpreneur from Pakistan with a product" :)
Thanks
Posted by: Raza | Sep 20, 2006 10:43:02 AM
When I saw the live quotes of YHOO turning to double-digit red, I was wondering what possibly could have caused such a negative sentiment on the stock. I was more than surprised reading that all the mess in the Internet stocks was initiated by an honest line by Susan (Yahoo! CFO) about sales estimates for 3Q: that was not even a profit warning: Yahoo! just sees its sales at the bottom line of expectations because of weaker advertisement market in the automotive and financial segments. That was pretty expectable considering a slowing housing market (thus mortgage) and the doom period for Big GM and Ford. No surprise that having to lay off and to shut down several plants, Ford had decided to buy less fancy banner on Yahoo! properties.
So we are ready to ignore and dismiss a -11% in YHOO and buy more stock? I have my doubts: pheraps there's something we don't see. YHOO had always enjoyed a premium multiple on traditional media because of its anti cyclical revenues: the big shift from traditional media to internet media from big corporations should outweigh and sterilize downturns in business. Yesterday Susan told us “we are becoming more sensible other business’ health” One quarter is too much of short time to say that the party is over, however it's a signal and a source of concern. I think that YHOO has still space for growth: not only because the shift from traditional media is not over, but because of internal growth trough Panama and brand awareness. If I’m wrong, I think that an EV/EBITDA in the Newscorp zone is justified and I don’t see an upside opportunity in the stock.
Speaking of serious subject (not quarter expectation).
YHOO has started again to loose market share in “queries” during the month of august.
What do you think of Yahoo! Current Tv?
And what about Yahoo using traditional media in order to promote its brand? Isn’t it a bad sign for an Internet Company?
Posted by: Daniele Della Seta | Sep 20, 2006 11:02:14 AM
Buy low / Sell high.
Nothing more, nothing less.
Posted by: Jim Eiden | Sep 20, 2006 11:05:35 AM
Behavorial Targeting has really opened up these two industries (more than others) as to the power of RETARGETING consumers on inventory, that is just not as expensive as portals....
Thus, when a large company with a "considered purchase product" (like auto or mortgage) is faced with a choice on HOW BEST TO SPEND MONEY ONLINE ---- the highest CPM placement will often times lose...(unless they see their consumers at a higher frequency than others)
this is one scenario where portals and large branded websites (with high CPM's) will lose and not be able to compete.
It's about ROI - and the auto makers (and their agencies) understand the value of media and technology online, more than most verticals...
Posted by: andy | Sep 20, 2006 1:05:28 PM
I recommend complementing your fundamentals perspective with some chart reading.
If you drew a simple trendline from January peak to July peak preceding the last bottomfishing opp., you would have noticed the resistance at around $30. YHOO's repeated inability to cross that resistance would been a strong enough signal for me to take the $5 profit and run if I bought at $25.
This time, there isn't as much head room so I think YHOO needs more time to gather enough energy to break out, say 1 to 2 weeks.
Posted by: Don Park | Sep 20, 2006 3:28:00 PM
Yahoo has huge problems that will not be soon corrected.
1. our customers spend $30M a year on Google and only a fraction of that on Yahoo because Y!'s management systems are so messed up;
2. internal Yahoo product development and management on the search engine ad side is in a shambles, and they can't find their way. You can bet that Panama will be delayed again. We have had many meetings with Y! tech people over the last 18 months to try to make our product work for our customers on Y! and have gotten nowhere, meanwhile at G, everything works like a charm. So the money flows to G and away from Y.
3. IF Y! could fix their problems they could take back a lot of $$'s because all my customers would love to diversify away from G a bit and spend more on Y!
Posted by: Joe Agliozzo | Sep 20, 2006 3:33:27 PM
I echo Andy's comments and add the following:
I bet Yahoo has priced their autos like home sellers did during the housing bubble, they kept assuming prices would go up. At some point CPMs can't increase forever there are constraints around how many unique visitors they see as well as page views and quality of the actual ad placement. There are competitors out there and if pricing gets to out of line taking into account those issues they may not get their assumed share or increased rates.
Posted by: Rob | Sep 20, 2006 4:27:11 PM
We spend > $2.5 million a year on Google and Yahoo can't manage to show enough ads to clear even $50K from us. We put in the same keywords for both, so ...
Time to clean house at the exec level at Yahoo.
Don't be misled by your cashflow analysis. They will keep finding a way to disappoint. I remember buying 3Com on similar cashflow basis in 1996-7. That was a genius move alright - NOT. This is not to say that I would buy Google at these prices (Cisco is back at 98 prices now, so Google in 2014 could be still at $400), just that Yahoo isn't the bargain you think it is, considering they are losing altitude rapidly.
Posted by: James | Sep 20, 2006 7:01:17 PM
I have been using Google advertising for many different companies for almost as long as Google has offered the service. They are clearly the place to go for this service and there are many many little and simple things they do to make their system work for the advertiser. I am still amazed to the extent that the other companies don't get it. They can't even copy Google's features from four years ago and get it right, much less keep up with Google's moving target. I think this is a function of Google's data driven culture (if you have data driven as a core cultural value you will produce the best system).
By the way, those of us who do a lot of PPC advertising all really really want the other providers to get it. We want to do well everywhere we advertise!
Posted by: Thomas | Sep 21, 2006 9:37:54 AM
YHOO has a triangle target price of $10.00.
Chart and commentary at: http://www.technicaltrades.net/2006/09/20/yhoo-2/
No way I'd be long this stock. Good luck!
Posted by: Spike | Sep 21, 2006 10:39:23 AM
I prefer Newscorp because of MySpace.com Aslo AOL has content and news with a "free" model hoping to bring in viewers and thereby attract advertisers.
One fact to consider:
AOL: in 2005 had a 25% increase in advertising
YHOO: in 2005, a 30% decline in advertising
Posted by: Lisa | Sep 21, 2006 11:29:52 AM
the future's always easier to read after it's happened...
why didn't these search sector gurus comment on your original post two months ago?
Posted by: Gabe | Sep 23, 2006 3:05:55 AM
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