>90% gross margins attracts competitors, believe me. I question if the 90% gross margins spoken of so many times are real or manufactured.
Dave, I'm a long time reader and first time poster. I've read with interest your posts for some time. Here goes with mine:
High gross margins don't indicate much more than the product being sold doesn't cost much to make. Doesn't tell you anything about whether it's a good business to be in.
Microsoft has high gross margins, Wal-Mart and Home Depot have low gross margins. All are great businesses. It makes sense to me that Yahoo has high gross margins, as all they are paying for are their net connections and their servers.
Now high net profits after tax matter a lot more. Yahoo's funny-money "pro forma" profits are 29% last quarter, down from 33% the quarter before. Their real profits were 19%, down from 24% last quarter. These are admirable profits, but Yahoo will have to keep these profit margins at a much larger scale to justify their market cap. The only companies that have profit margins like this at large scales are unregulated near monopolies like Microsoft and Intel. No way will profits like these at a large scale not attract incredible competition.
I saw one valuation justification for Yahoo hoping for cash flow 80-90% of revenue when Yahoo is a $billion (rev) company in 2001. I don't think there's been a company in the history of capitalism that's sustained 80% net profits.
But this market isn't about justified valuations. It's about greater fools. Different parameters than valuation count here, such as: How much of the nation's (or world's) wealth is in the equity markets? How much could that quantity of money invested increase by? Based on this, I can't discount the idea of a Dow at 20,000 -- and Yahoo at 500. Investors in this market have also displayed a great deal of resilience, so I don't see any reason to think they'll pull the money out until they want to spend it. Overall this will begin to happen in a big way about ten or twenty years from now as the overall population begins to gray. The stock market has become like a giant bank, and I don't see any reason people will withdraw their savings until they need them.
The bulls on these threads intuitively understand this, and that's why they don't listen to any arguments about valuation. They don't listen because they know it doesn't count any more.
Yahoo's valuation stopped being rational past about $1 Billion. Once it became disconnected from rationality, there was and is little stopping it from becoming a $100 Billion company. There are only two things I can think of: All the insider shares, such as Softbank's, and the flood of IPO's. Each of these will whittle away at the stock price. |
