Yahoo's Rise Shows How Wacky Is the World of Internet Stocks
Using old-school market logic, portal shares should be falling
MARK VEVERKA Tuesday, November 24, 1998
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If Wal-Mart were in serious talks to buy Sears, Roebuck, would Dayton Hudson's stock soar 16 percent in response to the news? I doubt it. But just because America Online and Netscape are slow-dancing cheek-to-cheek, Yahoo's stock vaulted nearly 31 points yesterday. (Sun Microsystems is also expected to figure in the deal.)
Ordinarily, Wall Street would often punish a stock if a key rival were close to making a blockbuster acquisition. The psychology being that one competitor would be on the verge of getting bigger and badder while the other stood still.
But such is not the case in the wacky world of Internet stocks. Yahoo zealots are rationalizing the share rise as an affirmation that their investment has a better business model than AOL. Hence, the impetus for the AOL-Netscape combination.
AOL merely jumped around 6 percent percent, while Yahoo took off like the space shuttle. Of course, Internet stock aficionados would argue that Yahoo and AOL are not competitors. They would say that AOL is an online service, and Yahoo is an Internet directory, stressing the point that each company is a leader in its respective ''space.''
Well, that's bunk. AOL and Yahoo may boast different business models, but they are both Internet portals. And they are competing to be the most widely used Internet media companies on the Web.
And because their stratospheric stock valuations are based on revenues expected during the next millennium, it would seem logical to consider that by 2005 the two companies will resemble each other as much as Wal-Mart and Dayton Hudson do today. That is to say, if they both survive as independent entities, you can bet that AOL and Yahoo will share more similarities than differences several years from now.
Thus, if you apply old-school stock market logic (hey, work with me on this), Yahoo and other portal stocks should be taking it on the chin about now.
Other Internet ''stocks should be going down, not up,'' says David Simons, managing director of Digital Video Investments in New York.
If AOL successfully acquires Netscape's browser and Netcenter businesses for nearly $4 billion as reported, AOL could be getting a steal given the high-octane valuations that investors place on leading Internet stocks, Simons says. For example, using Yahoo's price- to-sales ratio of 286, Simons figures that Netcenter alone should be worth five times more than what AOL is offering.
''To be honest, I was surprised by how Yahoo's stock responded,'' says financial analyst Derek Brown of Volpe, Brown in San Francisco, who has a ''hold'' recommendation on Yahoo.
''(But) we've been noticing all year that category leaders on the Internet stocks have benefited disproportionately to investor enthusiasm,'' Brown says.
Oftentimes, mergers beget mergers. Does Brown think that Yahoo might hatch some kind of counter move to AOL's potential deal with Netscape? ''Yes, probably, but I wouldn't even guess what that would be,'' Brown says.
In some ways, the AOL-Netscape- Sun talks are having an effect on Internet stocks similar to the buyout- spree of portals last summer. When Disney bought a chunk of Infoseek and General Electric's NBC bought pieces of Cnet and its Snap search engine, the Internet pack got frothy. And it's possible that more consolidation is in the offing, says Bruce Lupatkin, the former Hambrecht & Quist research director who is starting his own technology investment fund.
To be sure, he's not certain that Yahoo should buy another Net company just to add eyeballs. ''I think Yahoo has to continue to do what they've done so far'' building their business, Lupatkin says. ''I don't think they need to rush out and buy another search engine company, for example.''
But what if Yahoo were to buy or merge with a quality electronic commerce site, one with a real business model? Say Amazon.com?
''I think that would make a whole lot more sense. I think everybody is hanging their collective hat on e- commerce,'' Lupatkin surmises.
And a bunch of Yahoo shareholders are hanging their hats on AOL, Netscape and Sun.
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