FROM WSJ tonight Surprise YHOO Overvalued!
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Heard in California
Some Analysts Watching Yahoo!
See Little Reason for Excitement
By MARK VEVERKA
Staff Reporter of THE WALL STREET JOURNAL
Is it time for investors to stop yelling yippee for Yahoo!?
Since going public at $24.50 a share in April 1996, the Santa Clara-based Internet-directory company has seemed as if it can do no wrong. Yahoo closed that first trading day at $33, and it has been soaring ever since. Last year, it was the top-performing stock in The Wall Street Journal/California stock index, vaulting 483.5% during 1997 to close Dec. 26 at a split-adjusted price of $66.13.
Since then, Yahoo shares have enjoyed another 25% surge, rising to their current level of about $84.
Yet considering that the company has barely made a dime (well, actually, four cents a share in 1997, not including extraordinary charges) and its trailing price/earnings ratio has smashed the 2,000 mark at 2,050 (again, ignoring charges), the skeptics are starting to speak up.
"Investors have thrown out the traditional measurements, so buyer beware," warns analyst David Readerman of NationsBanc Montgomery Securities in San Francisco. He has a "hold" recommendation on Yahoo.
For the most part, even cautious souls such as Mr. Readerman admire Yahoo and its team of executives. "It's a great company," he says.
But here is his primary cause for pause: The stock is grossly overvalued by almost every traditional yardstick.
Do the Math
For starters, Yahoo's market capitalization of $4.36 billion is 34.5 times its projected 1998 revenue of $126.5 million, Mr. Readerman says. By comparison, that's more than double the figure for another Internet-related company that many investors are familiar with: Microsoft.
And there is, of course, a huge difference between Yahoo and Microsoft: The Redmond, Wash., giant has demonstrated a proven ability to book boatloads of profits selling software. As for Yahoo's earnings, they've been in short supply. The company only became profitable (less than a penny a share) in the first quarter of 1997. The company's forward-looking price-to-earnings ratio is around 221 -- nearly 10 times that of the Standard & Poor's 500.
Although it's so early in the life of the Web that many investors don't seem to care much about the bottom line for Internet companies, "I'm having difficulty rationalizing Yahoo's current valuation," says Mr. Readerman. He's recommending that shareholders reduce their positions while the price is so high.
Adds Andrea Williams of Volpe Brown Whelan in San Francisco, who rates the stock a "neutral": "It's trading at a valuation that is pretty scary. There just isn't room for stumbles or shortfalls."
The numbers aren't the only concern. Short-sellers -- those who are betting that the stock will take a tumble -- now own about a third of all available Yahoo shares, according to filings with the Securities and Exchange Commission. And that, analysts caution, can promote volatility in the price.
There are also basic questions about the underlying strength of Yahoo's business. The company is the default page -- or starting point -- for millions of Internet users, and makes its money by selling advertising space and merchandise through partnerships. But some remain incredulous that the pace of paid advertising on the Web will be anywhere near what enthusiasts believe.
"The basic business model isn't proven yet," says technology investment adviser Michael Murphy, who is also publisher of the Overpriced Stock Service, a newsletter based in Half Moon Bay.
"You've got a barrage of people buying the stock simply because it's going up," Mr. Murphy adds. "It's a recipe for disaster."
So why is Yahoo defying gravity?
The company was started in 1995 by two then-Stanford University engineering students, Jerry Yang and David Filo, who devised a software program that provided an easy-to-use directory for Web surfers. "Our original goal was to connect anything to anybody," says Chief Executive Tim Koogle.
Today, Yahoo has become the most popular navigational tool on the Internet. An estimated 32 million adults use its service at least once a month. That about equals the customer base of its nearest two competitors combined: Santa Clara-based Infoseek and Mountain View-based Excite.
"Yahoo is in a category by itself," says Evan Neufeld, an analyst at new-media research firm Jupiter Communications in New York.
So far, Mr. Neufeld explains, investors have been willing to fork over a lofty premium because Yahoo stands to offer the biggest on-line audience if Internet advertising and commerce takes off sometime in the next millennium -- a development that many observers believe to be inevitable.
In short, if the Internet does for Yahoo what the airwaves did for early broadcasters, it has the potential to become a major media company, argues buy-side analyst Irene Yu of Amerindo Investment Advisers. The San Francisco firm owns about one million Yahoo shares, or a 4% stake.
"The real value is strategic," Ms. Yu says. "Yahoo has a lot of power in where it can direct people" on the Internet.
The Netscape Factor
But others say that there are no guarantees Yahoo will maintain its leadership position. Just ask shareholders of Netscape Communications. When the Mountain View-based browser company went public in late 1995, it was one of the hottest initial offerings to spring from Silicon Valley. And it was almost unthinkable that any other browser could knock Netscape from its perch, analysts and investors say.
Think again. Today, Netscape is trading around $19 a share -- far from its 52-week high in July of $49 -- and has been badly hurt by Microsoft, which is packaging its Explorer browser with its Windows 95 operating system.
Fortunately for Yahoo, Microsoft has expressed little interest in starting an on-line directory, analysts and investors say. But, they hasten to add, that doesn't mean Yahoo can expect to dominate the market forever. Other large media companies may well be interested in buying up Infoseek or Excite, instantly giving them the muscle to really challenge Yahoo.
Yahoo's rivals, after all, have a couple of things that may make them attractive to suitors. For one, they boast technology that analysts and industry executives say is faster than Yahoo's. And, of course, their shares are a lot cheaper.
Just because Yahoo is "winning the war for eyeballs" today doesn't mean it will be three to five years from now, says Mr. Murphy. "I think this is really goofy to predict that this is a war that's over."
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Sooner or later, sooner or later.......
Dave |
