Just read a report (avail. free) from Wit Soundview analyst Jordan Rohan. Raised Yahoo! to Strong Buy from Buy rating on May 4 at price of $122.06. Attractive valuation was one of the key reasons. He thinks that there is a chance Yahoo revenues could get to $2.5 billion in 2002, vs $1.45b in 2001 and $1.037 in 2000.
Here is the part I don't understand AT ALL. The market cap of Yahoo is $75 billion. The entire US advertising spending is moving up to near $200 billion by 2002, according to the Wit report. Let's be really bullish and say that we can see the total getting up to $300 billion. Internet advertising is going to move up from 2% of all ad spending to 7-8% of the total by 2002, says Forrester, again according to the Wit report. Hey, let's say that is way too conservative. Let's double it to 15%. Hey, let's quadruple it to 30%. I mean this Internet thing is so darn big that no one could possibly get the projections big enough. So we have $300 billion times 30% or $90 billion of projected online ad spending. Now Yahoo had 15% share of online ad spending in 1999. The analyst used to think Yahoo's share would go down, but now he thinks it could be flat or up. Ok, let's assume he is probably too conservative. Let's say Yahoo is going to get its market share up to 20%. No, it is a really great company. Make that 25%. So 25% of $90 billion, looking out a few years, oh maybe only 5 years, that would be a really awesome number. 90 x .25 = $22.5 billion in revenues. And hey, that is just looking at the US. Let's double it to make it global. Call it $45 billion in revenues. Wow. That sounds really great.
Now, let's take a look at valuations. Ooops. You mean Yahoo ALREADY is worth $75 billion??? That means the market is ALREADY discounting revenues of WAY more than our super-ultra-extreme-bullish $45 billion. (For old economy companies, multiples of 1 to 3 times revenues are typical.)
Hmmm. So this analyst likes Yahoo!'s valuation because he thinks they could get revenues up to..get this... $2.5 billion in 2002? I don't get it. Maybe he likes it because they will make revenue from non-advertising sources? But there is NOTHING in the report about other types of revenue. The whole investment thesis is built around advertising revenue.
Now, if he thought Yahoo! revenues in 2002 were going to hit $25 or $50 billion, and grow strongly beyond that, then I could see how that might be interesting. But $2.5 billion revenue in 2002, to explain a $75 billion market cap?
Yahoo! valuation already discounts the company having 100% market share of all Internet advertising on a global basis. So I don't see where anyone makes a plausible case for the stock being attractive because it might do well with online advertising.
What am I missing? (or what is he smoking?)
--thinking seriously of going short Yahoo!, much as I love the services. |
