old article from MSN MoneyCentral, there are a few lessons in there...
Posted ** 9/17/99 **
Price 163 1/8
Change -5/16
"(Yahoo! has) been aggressive but measured in their acquisitions and they've done all that without a hiccup in their metrics in terms of new users, page viewers, revenues."
-- Emeric McDonald, Amerindo Technology Fund
Company Focus
HAS YAHOO STOCK HIT A BRICK WALL?
It's the top Internet portal site and shares have soared more than 1,000% in the past two years. Yet despite a stream of new services, the stock is up 'only' 31% year-to-date. What's going on?
By Barbara Grady
Yahoo!, owner of the most-visited network of sites on the Web, has hit its stride as a company. Some 2,700 advertisers and 6,000 merchants supply it with a revenue stream running at $500 million a year. Its profit margin has grown almost every quarter, and now exceeds that of most media companies. And it has won the hearts of Establishment investors on Wall Street.
The stock, however, is a different story. After soaring 511% in 1997 and 584% in 1998, shares in the world's most famous virtual company have run into a very real brick wall, advancing just 33% this year. Even the shares of bumbling aircraft maker Boeing (BA) have done better, gaining 38% in 1999.
To make its next move at boosting shareholder value, therefore, Yahoo! (YHOO) is building like mad, rolling out new services at a rate of 10 a month and rapidly expanding overseas. It now operates in native languages in 19 countries, and doesn't intend to stop there.
Keep adding services
Says Jeffrey Mallett, the company's president: "What we are driving toward is to continue to be one of the big three global Web networks. What that means is successfully facing the challenge to provide more services, a challenge that comes less from competitors than from our 80 million users. They are very interested in more services."
Mallett says he aims to fulfill any reasonable demand customers make. And when the company can't build a high-demand service fast enough, it will buy one. Last month, for instance, the company added Yahoo! Mobile for wireless devices, Yahoo! Digital streaming audio and video services, Yahoo! Open Mic for amateurs to publish their music, Corporate My Yahoo!, which integrates the Internet with corporate intranets, Yahoo! Greetings, Yahoo! Briefcase, an auction service in France, new content from Onhealth.com and expansion of its Yahoo! Sports. All of that comes on top of the services provided via acquisitions of GeoCities and Broadcast.com over the past 18 months.
While the effect of all of these new services is to add expenses before income materializes, many of these services won the praise of industry analysts, particularly since Corporate My Yahoo! and Yahoo! Digital streaming media were considered true innovations that will rapidly draw new customers and advertisers in a virtuous spiral.
A large planet with gravitational pull
Also, consumers on the Internet are fickle, notes Brown Brothers Harriman analyst Dawn Simon. Yahoo!'s 80 million users visit lots of other Web sites, and if Yahoo! doesn't keep delivering what they want, someone else will.
Says CS First Boston analyst Lise Buyer: "Increasingly, we view Yahoo! as a very large planet, one with an increasingly strong gravitational pull. It looks as if the Yahoo! network is attracting Web users, merchants and advertisers with an ever-increasing force at a steadily increasing pace. The more it grows, the stronger the pull. Brand and traffic lead to revenues which can be used to build the brand and the traffic further."
Salomon Smith Barney analyst Lanny Baker believes the company has become the clear leader in the race to accumulate the largest number of users and the heaviest usage. Both are increasingly attractive to mainstream advertisers, making the company perhaps one of the very few that potentially can survive on ads alone. "Yahoo! has realized an invaluable and increasingly powerful strategic position within the fastest-growing media and communications market in the world," says Baker.
But what about the stock?
Yet the stock is still virtually dead in the water. To be sure, it has outperformed the broad market by a tad, but that's hardly the pace of legend (and small solace to anyone who bought at April prices that were 25% higher than Wednesday's close). Worse, most analysts can't point to any event that could be the next big catalyst for further gains, since shares already reflect an incredibly rosy outlook for the next half a decade. According to Standard & Poor's, the stock trades at a multiple to trailing 12-month sales of 95, about four times the level of other successful high-tech stocks. For comparison, Microsoft (MSFT), publisher of MSN MoneyCentral and a Yahoo! competitor, trades at a multiple of 23 times trailing 12-month sales, while America Online (AOL) trades at a 21 multiple, Cisco Systems (CSCO) trades at an 18 multiple and Sun Microsystems (SUNW) trades at a five multiple.
In effect, analysts say, the company simply needs to grow into the valuation it already has, a bumpy consolidation process that could take at least another 12 months of emotional new highs and lows that leave it ultimately at today's price. "We continue to see the value in Yahoo! stock, but are challenged to figure out how quickly it can grow to much-higher levels over the near term," says veteran Internet analyst Keith Benjamin of BancBoston Robertson Stephens.
Others are more hopeful. Simon of Brown Brothers and industry researchers at Forrester Research and Jupiter Communications, for instance, think advertising revenue streams could be much better down the road than currently believed, and that mass-market broadband access will compel higher viewership rates.
Comparing the move toward broadband access to the arrival of color television, Baker says: "If history repeats itself, the online media companies who are competing for ad revenue may be even bigger beneficiaries of broadband than the phone companies, cable companies, satellite players and high-speed access providers who are racing to deliver the service to consumers." He thinks the profit per user will approach that achieved by broadcast television, or about $30 per watcher per year. If he's right, that's about $2.4 billion in income at today's level of users, a big number that should rise dramatically in years to come.
No change in ownership, look or feel
While it won't comment on the stock or the potential of the stock, Yahoo! says its business growth will continue amid turmoil in the industry, if it sticks to the strategies that have worked for it so far -- branding, continually "going broader and deeper" with services, international expansion, offering advertisers more to buy and maintaining consistent quality.
"I think we have been very consistent in running a high-quality site," Mallett says. The site has never been down from an outage and has maintained its plain blue-gray-red look. "A lot has been happening this last year -- Netscape was sold to America Online, Excite and AtHome (ATHM) merged. We remain independent. We've not had any change in ownership or look or feel. We've benefited when (competitive) services have changed and some (of their) users have gone."
Yahoo!'s largest institutional shareholder, Amerindo Investment Advisors, believes this year's tame performance is unimportant. "We're not very easily shaken by temporary market flux," says Emeric McDonald, co-portfolio manager of Amerindo Technology Fund (ATCHX), which owns close to 5 million shares. "Yahoo! is one of our most important holdings. Clearly, it's a leader in its market space. They have executed phenomenally well. They've been very methodical and effective in rolling out new services, e-mail, bill-paying. They've been aggressive but measured in their acquisitions and they've done all that without a hiccup in their metrics in terms of new users, page viewers, revenues."
Party isn't necessarily over
In the near term, Yahoo! shares could advance sharply into its summer-quarter earnings release, scheduled for the second week of October. After that, the crystal ball gets hazy. But as Mallett and his minions venture forth at a blistering pace from Santa Clara to conquer the world of new media and commerce in the new century, shareholder value may not follow.
Of course, even if the stock stays flat for a while, it wouldn't necessarily mark the end of the party for Yahoo! shareholders. Consider the precedent of Dell Computer (DELL), the most successful stock of the past decade. Shares in the pioneering personal computer company had advanced at pace similar to Yahoo!'s from January 1990 to January 1993. Then came a 16-month period in which the stock was dead money.
After that, Dell shares resumed their torrid pace and are up another 5,900%. Not a bad return for a little patience with a proven competitor. |
