Hambrecht & Quist Research Report that was released on March 5th. For those who haven't read it yet, here it is:
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Yahoo!, Inc.
Price: 402
Recommendation: BUY
Notes: a, f
Firm: Hambrecht & Quist
Department: Technology
Industry: Communications Technologies
Date: 3/5/99
Q1 Q2 Q3 Q4 FY
1999E 0.08 0.09 0.10 0.12 0.40
PREV 0.08 0.09 0.10 0.11 0.37
2000E 0.12 0.13 0.13 0.14 0.52
PREV 0.11 0.12 0.12 0.13 0.48
52-Week Range 28-445 ** Market Cap 47,133
Shares Out 117 ** Avg.Pg.Views/dy 167 M
Advertisers 2,250 ** Gross Margin 90%
Cash Balance $482 M ** FY Revs $400.0
CY EPS 0.40 ** CY P/E NM
Yahoo!: Raising Recommendation to BUY
We are raising our recommendation on Yahoo! to BUY to reflect the company's
strenghtening position in an ever-expanding, yet ever more fractionalized
Internet marketplace. While valuation is still a significant concern, management
presentations made at H&Q's planet.wall.street Internet conference and Yahoo!'s
first analyst day have convinced us that Yahoo! is better positioned than ever
before to fully capitalize on a broadening range of opportunities in the
Internet space and thus more fully support over the long-term the heady
valuations put upon its stock.
Yahoo! turns four years old today. And if you ever wanted proof that Internet
years are like dog years, now you have it.
In a presentation at H&Q's planet.wall.street conference Monday, and again
Thursday at the company's first-ever on-site briefing for financial analysts,
the Web leader gave a compelling argument that its business model is maturing
even faster than we had expected. What had been a play principally on banner,
keyword and premier-placement advertising now appears poised to capture
significant new revenues from direct marketing and subscription services. Yahoo!
also seems ready to make bigger acquisitions, continue controlling costs and to
participate in the newly emerging means of accessing the Internet via low-cost
computing appliances and broadband access.
As a result, we are more confident than ever that Yahoo! will be able to
maintain - and over the long-term improve - its already healthy revenues and
operating profit. While we still harbor significant concerns regarding valuation
- Yahoo!'s $35.5 billion market capitalization represents a trading multiple of
89 times its 1999 projected revenue of $400 million - we also note that Yahoo!
current trading price is 32% below its all-time high of $222.50 reached Jan. 12.
While Internet valuations as a group may rationalize over time, we fully expect
Yahoo! to remain a front runner in terms of operating fundamentals and expect
that leadership to continue to fetch a comparative premium in terms of stock
price long-term.
Highlights
- Yahoo!'s competitive positioning is stronger than ever. Since its inception as
a company on March 5, 1995, Yahoo! has built an ever-expanding collection of
popular Web services. What began as a search and directory site, now gets only
20 percent of its traffic from these original offerings, as users spend more
time with chat, free e-mail, personal calendars, shopping, sports and soon -
with the pending acquisition of GeoCities - personal home pages. Yahoo!'s
execution has been excellent, and sets the standard for all Web portals.
Meanwhile, Yahoo!'s rivals are in flux. While we consider Lycos' proposed merger
with USA Networks strategically sound, Lycos still faces the daunting task of
working through the e-commerce driven combination over the months ahead.
Microsoft's portal efforts are suffering from a lack of integration and a strong
Web leader beneath President Steve Ballmer and CEO Bill Gates, not to mention
the distraction of a major antitrust lawsuit and a long-delayed effort to
complete its new Windows 2000 operating system. Infoseek is still developing its
partnership with Disney. In sum, Yahoo! appears poised to continue its
blistering growth, while many of the company's biggest competitors risk at least
a near-term loss of focus and momentum.
- New revenue sources. The company's core revenue stream is banner, keyword and
premier placement advertising, with a growing slice of transaction commissions
from online retailers. In presentations at Snowbird and to financial analysts,
company officials disclosed plans for promising new revenue lines. For instance,
Yahoo! is developing a new direct marketing service, attacking a $162 billion
traditional direct marketing industry. While Yahoo!'s revenues from direct
marketing are nominal now, they appear likely to grow rapidly, as the company
leverages its 35 million base of registered users, and 20 million Yahoo! mail
users. Yahoo! is also cautiously pursuing opportunities for subscription fees
and paid premium services. These efforts commenced with Yahoo!'s acquisition
last year of Viaweb, a Web storefront service that charges merchants up to $400
per month for catalog hosting.
Expect Yahoo! over time to layer on new fees for other premium services,
including high-end stock and financial information, auction listings (mirroring
eBay's auction charges) and technical services for power computer users.
Yahoo! is also aiming to collect new fees for the distribution of personalized
news and content alerts to pagers and personal information managers, as it
targets new computing appliances. While this will not be an easy undertaking
given that Web users today perceive Yahoo! as a "free" Internet offering, we
believe the company will be able to pull it off in those areas where it really
does provide value-add.
- Higher-profile acquisitions. On Jan. 28, Yahoo! announced its largest
acquisition ever, a $3.5 billion, all-stock purchase of GeoCities. The deal, set
to close by the end of May, combines the No. 2 (Yahoo.com) and No.3
(GeoCities.com) most visited Web domains, after AOL.com.
Yet, beyond building traffic, the transaction also signals a change of strategy
for Yahoo!. For the first time, Yahoo! will own and invest in a brand other than
Yahoo!. Company management made a point of saying that they expect to do more of
this. They believe that now, for the first time, the Yahoo! brand is strong
enough to exist side by side with other brands. Previously, Yahoo! confined its
purchases to companies so small that its brand could subsume the other brands.
The switch to a multi-brand strategy - which Lycos has used with great success
to rapidly build its Web reach - promises to let Yahoo! more rapidly expand its
own Internet audience.
Indeed, Yahoo!'s GeoCities acquisition highlights the promising potential of
intertwining separate, but popular Web domains. Yahoo! intends to grow GeoCities
revenues by targeting auctions and e-commerce offerings at GeoCities
homesteaders, something GeoCities has not successfully accomplished on its own.
Yahoo! also intends to offer GeoCities home-page building technologies to
registered Yahoo! users, and to provide GeoCities homesteaders access to
Yahoo!'s chat and e-mail services. Eventually, both properties will offer a mix
of each site's features in a customizable, drag and drop menu of Web tools.
- Broadband ambitions. With Excite's pending merger with @Home, and the
increasing focus of Web sites like Snap and, to a lesser extent, AOL, on
high-speed Internet access, investors have been increasingly concerned about
Yahoo!'s positioning in the emerging broadband world. With good reason. Yahoo!
has yet to strike a distribution deal with a broadband service. Expect this to
change, however. Yahoo! management suggested that they intend to strike a
broadband distribution deal by the second half of this year.
Meanwhile, Yahoo! has been quietly developing content for the emerging world of
high-speed Internet access. In a project dubbed Turbo Yahoo!, the company has
been testing content and services optimized for broadband access. Yahoo! has
also been labeling content in its directory as text, audio and video. If the
company chose, today it could roll out a multimedia Turbo Yahoo! service for
surfers getting online via high-speed connections.
- International opportunities. Perhaps Yahoo!'s biggest opportunities lie
overseas. Today, roughly half of the 130 million Web surfers live outside of the
United States. Yahoo! has an aggressive strategy of attacking this audience,
with localized versions in 18 countries, featuring local language content and
local site directories maintained by local staff. Yahoo! is containing
development costs by operating the overseas sites on Yahoo!'s low-cost
site-serving platform. Yet Yahoo!'s international ambitions are large. The
company is aiming, so far with success, to attract more than half of the surfers
in the countries it enters. That puts it in an excellent position to participate
in the emerging market for Web advertising and e-commerce overseas
In the midst of all these growth opportunities, Yahoo! management has signaled
that their emphasis on profitability and cost-containment remains as strong as
ever.
That bodes well for the stock. While it is richly valued today, reflecting both
Yahoo!'s strong performance and the continuing high investor demand for Internet
stocks, the valuation seems at least somewhat more reasonable given the
company's broadening range of business opportunities and revenue streams. We
believe Yahoo!'s model is stronger than ever as evidenced by our raised
operating predictions and that the company is truly poised to emerge as one of
the the media leaders of the 21st century. For the reasons outlined in this
report, we are raising our recommendation to BUY
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at this
time and are subject to change. We do not undertake to advise you of changes in
our opinion or information. In the course of our regular business, we may be
long or short in the securities mentioned and may make purchases and/or sales of
them from time to time in the open market, as a market maker, or otherwise. In
addition, we may perform or seek to perform investment banking services for the
issuers of these securities. Most of the companies we follow are emerging and
mid-size growth companies whose securities typically involve a higher degree of
risk and more volatility than the securities of more established companies. For
these and other reasons, the investments discussed or recommended in this report
may be unsuitable for investors depending on their specific investment
objectives and financial position. This report is not a recommendation or a
solicitation that any particular investor should purchase or sell any particular
security in any amount, or at all.
SPOT REPORTS: H&Q publishes brief Spot Reports covering very recent
or developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as a
result of subsequent additional information and analysis.
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment positions.
(f) Options are available on these issues.
(g) Entities associated with Hambrecht & Quist LLC have an aggregate beneficial
ownership of more than 5% of the outstanding equity securities of these
companies.
(h) Hambrecht & Quist LLC acts as a financial advisor to this company.
(r) Restricted. No recommendation at this time. May, but does not necessarily, |
