GS outlook....We added Yahoo! stock to the U.S. Recommended
for Purchase List on August 6 at an opening price of
$131. Our previous rating was market outperformer.
Although we have long regarded Yahoo! as a core
long-term holding for Internet investors, we took
advantage of the recent correction of Internet stocks
and upgraded the shares to better reflect our long-term
view of the company?s prospects.
The GS Internet Index (GIN) is down 43% from its
52-week high, as a few of the large-cap names
corrected more than 50% (America Online off 46%,
Yahoo! off 45%, eBAY off 53%, Amazon.com off
56%, Excite@Home off 62%). While the current
downside volatility may continue in the near term,
we believe that a bottom is nearing. Relative
multiple contraction for the sector has brought
forward 12- month price-to-revenue ratios for the
group to about 13 times, which is the lower end of
the range of 7 to more than 40 times over the last
two years (the bottom of the range was reached last
October, at the height of global meltdown concerns).
Consequently, for long-term growth investors, we
believe that now is the time to buy shares of
leadership names that have proven their ability to
build large-scale, multiple-revenue-stream
leadership models with top-and bottom-line
leverage. The broad selloff in the sector has not
differentiated the superior business models from
the also rans.
Following the recent closing of the GeoCities and
Broadcast.com acquisitions, we expect Yahoo! to be
one of the primary beneficiaries of the global, large-scale
growth of users and usage on the Web. As the
Internet increases penetration as a result of (1) new
devices, (2) broadband services, and (3) international
markets, we expect Yahoo! to improve its standing
as a broad-based horizontal portal catering to every
individual while it deepens its content and services
through a myriad of partnerships. To date, Yahoo!
management has executed impressively while
delivering strong financial results through 13
quarters, with 25% plus average sequential revenue
growth since its initial public offering (IPO) and
27% operating margins. With the recent pullback in
the share price, the stock is 45% off its high, a
correction only evidenced once since the IPO in
April 1996.
Leading the Web
Yahoo! has been a market leader in all aspects of its
strategy. The company's page views and registered
user count have consistently grown faster than those
of its competitors. Yahoo! has been a pioneer on the
direct marketing front and has consistently balanced
monetization of traffic by creating "stickiness" on its
site. Now, with the most recent acquisition of
Broadcast.com and its technology-agnostic platform,
Yahoo! is very well positioned to benefit from the
emergence of broadband access. Over the next
several quarters, we expect Yahoo! to integrate
streaming media capabilities throughout its network,
further improving the user experience as well as the
effectiveness of the advertising.
Over the last several quarters, Yahoo! has
maintained its monthly revenue per registered user
in the 80½ vicinity. Over time, we expect Yahoo! to
be able to extend this to $1 and to maintain its
market share, thereby growing its total revenue base
in line with the growth of the Web population
(currently more than 100 million). Although the
volatility of Yahoo! shares is far higher than that of
most other large caps, we recommend the purchase
of the shares to all growth-oriented investors.
Summary of Recent Results
Yahoo! reported strong second-quarter that
handily beat consensus expectations (see Table 1).
The Yahoo! Network continued to expand, as
unique worldwide visitors increased to more than
80 million, and registered users grew to 65
million from 47 million in the first quarter. Key
advertising metrics also showed positive trends, with
revenue per advertiser coming in at $43,000 and
renewal rates at 87%. Traffic grew 32%
sequentially to a solid 310 million average daily
page views in June. Excluding 40 million page
views from GeoCities, sequential page view growth
was still at a solid 15% or 35 million absolute page
views. We continue to view our new revenue and
earnings estimates as conservative, assuming that
management continues it stellar execution record
vis-…-vis the immense opportunities still ahead
and Yahoo!'s industry-leading business model.
Technology
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Internet Media United States
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Establishing New Estimates for Yahoo!
Our new 1999 and 2000 revenue and EPS estimates
for Yahoo! (following the Broadcast.com merger)
are $530 million and 34½ and $766 million and 54½,
respectively. Our previous estimates did not reflect
the Broadcast.com merger. We believe that our
estimates are conservative and that considerable
upside is possible on multiple fronts as Yahoo!
integrates broadband features across its network and
executes through the seasonally strong second half
and beyond.
Valuation
In terms of valuation, the most significant near-term
valuation risk for Yahoo! continues to be a scenario
of multiple contraction of the Internet sector.
Yahoo! currently trades at a multiple of 52.1 times
our 2000 revenue estimate versus 87.0 times at the
end of 1998. Although market segment leaders such
as Yahoo! have historically sustained their highs
better than second or third-tier companies, we note
that Yahoo! shares are off 45% from their 52-week
high. We believe that limited liquidity issues and
increased trading volumes by retail investors and
day traders will continue to contribute to volatility in
the sector. However, with improving fundamentals
across the board and a highly scalable media model,
we have added Yahoo! shares to our U.S.
Recommended List and view the stock as our core,
favorite long-term franchise holding in the Internet
space.
Second-Quarter Review
Strong Financial Metrics
Yahoo! continued to demonstrate the tremendous
operating leverage in its financial model, posting yet
another impressive quarter of solid growth. (We
note that all numbers include GeoCities but not
Broadcast.com.) Revenues of $115.2 million, up
24% sequentially and 157% year over year, and EPS
of 11½ were ahead of consensus estimates of $100.0
million in revenues and 8½. Gross margin improved
10 basis points from the first quarter to 86.3%.
Yahoo!'s operating margin of 32.1% was up from
27.5% in the prior quarter. Expenses were also well
contained, driving net margin to 24.6% from 20.0%
in the first quarter. Commerce revenues accounted
for 30% of revenues, roughly the same percentage
on a sequential basis. Yahoo! management
maintains its long-term operating margin goal of
30%-36%.
Improving Advertiser Metrics
The number of advertisers rose to 2,700 from 2,350
in the first quarter (includes GeoCities advertisers);
see Table 2. Revenue per advertiser was flattish at
$43,000 versus $42,000, while average contract
increased to 166 days from 145 days. The
Table 1: Yahoo! Inc. ? Summary of Second Quarter Results
Consensus Ests. Reported Comments
Revenue $100.0 (a) $115.20 24% sequential growth, 157% YOY
COGs 8.3 86.3% gross margin up 10 bp sequentially
Sales & Marketing 32.3 37% of revenues
Product Development 9.0 11.2% of revenues
G&A 3.5 6.0% of revenues
Operating Income 33 Oper. Mrgns of 32.1%, up from 27.5%
Net Income 25.1 24.6% Net margin, up from 20.0%
EPS $0.08 (b) 0.11 Top line strength, DSOs down,
Deferred Revenues up $16 million
(a) I/B/E/S consensus revenue estimates
(b) First Call consensus EPS estimates
Source: Company reports and Goldman Sachs estimates.
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Internet Media
Goldman Sachs Investment Research 3
advertising renewal rate was 87%, with 49 of the top
50 advertisers renewing. No customer accounted for
10% or more of revenues.
Still Rising International Usage
Yahoo! reported that it had 80 million unique users
visit its properties in June (versus 60 million in
March); a third of the users were outside the United
States. The number of registered users grew to 65
million from 47 million last quarter. Yahoo!
management indicated that it is the number-one or
number-two destination in major international
markets. Yahoo! believes that its brand, content-aggregation
capabilities, and scale will allow it to
maintain a lead over its domestic and international
competition.
Strong Balance Sheet
Yahoo! generated $31 million in cash during the
second quarter, despite having made a $10-million
minority investment (no additional details are
available). Yahoo! ended the quarter with $638
million in cash and no debt. Deferred revenues rose
to $64 million from $48 million in the first quarter
and $20 million a year ago. For the 13
th
consecutive
quarter, days sales outstanding improved to 27 from
32 on a sequential-quarter basis (restated to include
GeoCities).
Maturing New Media Model
Yahoo!?s business continues to mature from a page
view/CPM-driven model and to a diverse multiple-revenue-
stream story with large growth
opportunities on all fronts. These opportunities
include direct marketing, sponsorships, promotions,
hosting, placement/distribution, merchandising,
member acquisition, transactions, and advertising.
We expect Yahoo! to layer in these additional
revenue streams organically through a more
aggressive acquisition strategy and via its Fusion
Marketing Online (FMO) initiative.
Industry-Leading Metrics
Yahoo! continues to excel in all key reach, duration,
and frequency metrics (see Table 3) as measured by
Media Metrix.
Table 3: Key Media Metrix Statistics
Home/Work Home Work
Reach 59.2 53.0 59.8
Days per person/month 6.0 2.7 6.3
Pages per person/month 68.2 50.9 73.3
Min. Usage per day 11.2 10.7 10.3
Min. Usage per month 66.8 53.0 64.4
Source: Media Metrix.
Table 2: Yahoo! Inc. ? Summary of Key Metrics
Q2 1999 Q1 1999 (a) Q4 1998 (a)
Total Qtr end PVs (M) 310 235 167
Total PVs in qtr (B) 26.3 19.5 15
YHOO Japan PVs (M) 22 17 13
CPMs (our estimate) $26 $26 $26
% Commerce Revs. 30% 30% 25%
Total Advertisers 2,700 2,125 2,225
Revenue/Advertiser $43,000 $42,000 $34,000
% Top 10 Customers 20% 28% 24%
Adv. Retention Rate 87% 91% 94%
A/R (DSOs) 27 28 34
Uniq. Reg. Users (M) 65 47 25
Employees 1,278 920 673
(a) Excluding GeoCities; Q2:99 includes GeoCities
Source: Company reports and Goldman Sachs estimates. |
