I came across this article in Forbes I think from last February if I recall correctly. It illustrates how profitability can be easily manipulated to create hugh market caps for some of these Internet Stocks. Neither the Author nor I suggest that there is fraud involved in any of this, but I have to agree that Yahoo's profitability and hence it's market price and hence Softbank's market price can be boosted by active management with the increased share prices helping mergers and aquisitions during the Company building phase.
Forbes Magazine
TOUTED AS ONE OF the few Internet companies making money, Yahoo seems to defy gravity. But in fact, some of that buoyancy may be hot air: Most of Yahoo's celebrated earnings have not come from selling goods and services.
In the third quarter of 1998, Yahoo reported earnings of $16.6 million (15 cents per share), of which an astounding $5.2 million—or 31%—came from the interest generated from the company's cash holdings of $430 million. For fiscal years 1997 and 1998, Yahoo's interest income accounted for nearly 40% of the bottom line. Analysts project that interest will make up about a third of this fiscal year's earnings as well.
If that seems like a lot, it should. Compare this with other portals such as Excite, which regularly reports an interest loss.
Yahoo's high interest income is also unusual compared to other technology companies. Microsoft's interest income represents only about 15.5% of its earnings, Cisco's just 12.5%.
Where else does Yahoo generate earnings? Banner ads. Seventy-four percent of its 1998 third- quarter revenues ($53.6 million) came from banner ads. Of this, a little less than 10% was barter ads, which translates into no cash profits for the company. Another 8% of banner ads was bought by Softbank. And Softbank paid $240 million for a 30% stake in Yahoo (one reason the company has so much cash). So, in some sense, Yahoo is selling ads to itself.
Yahoo's third major cash source, accounting for 26% of its third-quarter revenues, came from commerce partnerships—for example, its deal with E-Trade to direct traffic to the online broker's Web site. But such commerce partnerships typically include substantial banner ad campaigns.
None of this is to suggest that Yahoo's profits are tainted...only that folks who invest in a company solely on the strength of its reputation should take a closer look.
—David Raymond
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