A Nasty Surprise Could Be in Homestore
By Jay Somaney
3/8/01 11:10 AM ET
The bluest of the New Economy's blue-chips is now cracking under the strain of a drastically slowing economy and a precipitous decline in online advertising revenue. Yes, I am referring to none other than Yahoo! (YHOO:Nasdaq - news - boards), which not too long ago was valued at approximately 15 times higher than it is today. In an aftermarket announcement Wednesday, Yahoo! reported that it now expects first-quarter revenue to come in at around $170 million to $180 million and earnings to be near break-even. My colleague Peter Eavis makes a good case that even at current levels, Yahoo! could still be overvalued.
So why are all the former Net darlings coming down hard and Homestore.com (HOMS:Nasdaq - news - boards) is managing quite well, thank you? Since my previous column Feb. 21, when the stock was trading a shade under $34, the company has seen the value of its stock decline by a "mere" 17% and it now changes hands at $28.50 or so. At current prices, Homestore.com is still valued at a giddy $3.5 billion or so, on a fully diluted basis and taking into account the 25 million or so shares issued to Cendant for the move.com acquisition.
Trying to See Past the Clouds
The company has a stated goal to bring advertising revenue down to 38% of its total revenue. Its first-quarter revenue forecast is $107 million, and its revenue split has been 48% advertising and the balance from subscriptions. If only 40% of its first-quarter revenue comes from advertising, that gives us approximately $43 million in expected contribution from that segment. Yahoo! missed its already guided-down revenue numbers by 27%.
Let's give Homestore a break and say that it'll miss the advertising part of its revenue estimates by a mere 20%, which gives us a net revenue number in the $98 million range. That would give us a quarter-over-quarter decline of almost 9% from the $106.4 million in revenue that Homestore had in the fourth quarter of 2000. Let's not even begin to hazard a guess at how bad things could get for the rest of the year. There's absolutely no visibility for the next few quarters right now.
Three important factors also have to be taken into account here. We are assuming that Homestore.com will be impacted to a lesser degree by the advertising slowdown than kingpin Yahoo!. Another important assumption is that Homestore's expected subscription revenue remains as previously forecast. Third, the data from the Commerce Department for January and February have shown that the current economic environment is beginning to have a significant adverse impact on new and existing home sales. Those are big assumptions -- ones that I wouldn't be willing to bet on.
Let's play devil's advocate and say that Homestore's ad revenue is negatively impacted by 30%, which would then give us adjusted first-quarter revenue of approximately $94 million, or a sequential quarterly decline of almost 13%. I shudder to think what the revenue numbers will look like if the slowdown does indeed have an effect on its subscription revenue.
So why do its shares remain at these lofty levels? Analysts on the Street still remain very bullish regarding the company's prospects. One premier broker actually upgraded the stock a couple of days ago. Another reason is the fact that institutions control almost 73% of the float. Between these institutions and company insiders, approximately 85% is in what could be construed as "friendly" shareholders.
If what's good for the goose is good for the gander, then it shouldn't be long before we receive a nasty surprise from Homestore.
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good luck. |
