HI... :) may as well PUT a smile on while we wait! Check this out
:
By any measure, Internet stocks had a terrific third
quarter run-up, and navigation network Yahoo was one
of the front runners. It tumbled with the market this
week, but just three weeks ago, Yahoo [YHOO] was
trading at a 52-week high of 58 5/8.
That price established Yahoo's price-earnings ratio
firmly in the stratosphere and led many to wonder, is it
worth the price?
Every penny, some say. Yahoo is one of the
best-known brands on the Internet, with future earnings
worth betting on. But in the rush to anoint Yahoo the
Internet champion, others said they believe the stock
has simply become too expensive.
Robert Harden of Silicon Valley Capital Management in
Palo Alto, Calif., sold his Yahoo position Monday
morning. By the afternoon, it was down 20 percent.
"It's going to do a 50 percent pull back," Harden said
he predicted. "Yahoo's going to 30."
That may be an extreme view, but analyst Andrea
Williams at Volpe Brown Whelan downgraded Yahoo
to neutral last month (it was trading in the high 40s and
low 50s then) despite her admiration for the company's
concept and management. "There wasn't enough room
for risk in the multiple," she said.
Even Oppenheimer & Co.'s Henry Blodget, who
maintains a buy rating on Yahoo, said investors who
bought in the high 50s could be exposing themselves to
a 30 percent to 50 percent hit in the short term. "But if
you sit on your hands, you might be losing out," he said.
On the positive side, Yahoo is clearly the front runner
on the Internet. Its Website gets more than 50 million
page views a day, and the company said it has more
than 1,200 advertisers. Add to that the myriad
transaction and joint marketing deals Yahoo has signed
with market leaders -- Compaq, NBC, Amazon.com,
Visa, and ESPN, just to name a few -- and it seems this
company has nowhere to go but up.
But many of these deals haven't yet begun to pay off,
and some analysts aren't convinced by Yahoo's revenue
model. Advertising sales, which have supplied the
majority of the company's revenue so far, have been
growing an average of 34 percent sequentially during
the past four quarters.
Bill Schaff, an asset manager with Bay Isle Financial in
San Francisco, said that despite Yahoo's lead in the
market now, the barriers to entry are low and won't
prevent a bevy of competitors, both present and future,
from making life difficult for Yahoo.
"The ad model isn't very exciting, and prices are coming
down," Schaff said.
Others say the model is exciting, but requires a patient
investor. Asked if the advertising model works, Blodget
replied, "Why wouldn't it? You have a flat screen and
40 million eyeballs staring at it all day."
One who isn't willing to wait it out with Yahoo is
Lawrence York, who runs the WWW Internet Fund. In
September, York looked at his 100-plus percent gain
on the stock and decided on a little profit-taking.
Yahoo was one of the hardest hit stocks in Monday's
correction, falling 20 percent to close at 38, far below
its high of 58 5/8 on Oct. 6, so a strong stomach may
be what long-term investors need most.
"If people are willing to bet out like that, they are
probably willing to hang in for some downturn," York
said. "But we don't like to hold onto things that are 30
percent overvalued at minimum."
One of the difficulties in determining the value of Yahoo
stock is finding a relevant metric. Comparing Yahoo
with other navigation networks, such as Excite and
Infoseek, is interesting but says little about how it stacks
up against other market leaders.
Yahoo's valuation prompted David Readerman of
NationsBanc Montgomery Securities to drop his rating
on the stock earlier this month to hold from buy. In his
report, Readerman said Yahoo's forward
price-to-earnings ratio was about twice that of
Microsoft.
But Steve Harmon said Yahoo, a media company,
shouldn't be compared with a software company such
as Microsoft. According to Harmon, senior financial
analyst for Mecklermedia, which produces the Isdex
Internet stock index, it makes more sense to look at
how Yahoo's financial performance measures up to that
of online service America Online.
Even then, Yahoo appears expensive. For example, the
ratio of Yahoo's price to trailing 12 months' revenue is
around 47, while AOL's is closer to 5.
Still, Williams said the comparison is a good one,
especially because Yahoo is transitioning from an
aggregator model to becoming a full-fledged online
service similar to AOL. "It's still evolving, and that's
why you need room for risk in the multiple," she said. |
