YAHOO – Know what you're buying!
Yahoo like Microsoft? No Way.
As a senior executive in the computer and software industry, it never ceases to amaze me how the emotions of speculators can fuel a feeding frenzy on a low float stock like Yahoo. It has been a wild, profitable ride boys, and I thank you as I take my money and run from this roulette game.
I'm not prepared to get slaughtered as speculators and MM's wake up and realize that in their haste, they've just purchased a Corvette at Astin-Martin prices. Micron, Netscape, Iomega, Media Vision and others come to mind as somewhat contemporary examples of past feeding frenzies that made some of us a lot of money … at the expense of those left holding at the crash. The story is not new – in the late 60's, a slew of computer leasing companies manipulated small floats to keep their market valuations high, facilitating mergers and impressing creditors, customers and investors alike. The artificially high valuations permitted them to enter into numerous fragile deals, but when the accounting styles proved a bit too aggressive, the house of cards came down fast.
Yahoo is a prime example of another house of cards. Using the inflated currency of artificially high market valuation and the promise of at least 5 press releases a day, they give quite the illusion of substance. We've seen the uninformed liken Yahoo to Microsoft. Except for their shared talent at self promotion, there is no comparison. Microsoft, from day one, owned the Intellectual property that controlled the basic functions of ANY computer. They did not license DOS from Seattle Computer, they BOUGHT it, then licensed it to IBM and went on to develop their own products. The Wintel partnership was a lock – a high barrier to competitive entry, combined with a high cost to the customer to pursue alternatives (what few there were..). Yahoo does not even own its core service – the search engine.
Who ships a browser that defaults to Yahoo? What does it take to use Yahoo? A few minutes filling out a form? You don't even need to give your real name and address. Indeed, it is widely known that well over a third of Yahoo's supposed 26 million “users” are fake names – totally worthless toward the hype about their ability to someday deliver 1:1 marketing. And they're spread among over 15 different databases. Top industry pundit Jesse Berst recently wrote in an article titled “Can Yahoo Survive its Mega Screwup?” :
…”Yahoo is doing a poor job of collecting user names and demographics. Although its My Yahoo efforts represent an important first step, the company still lags behind in this all-important arena. It's doing an even worse job reaching out to those users with regular communications. In its arrogance and old-market mentality, Yahoo believes customers will always come to it. It scorns email reminders, push channels and other methods more forward-thinking companies use to reach out to customers….”
One absolutely needs Microsoft software to run most computers – the alternatives are few. One does not NEED Yahoo for anything and there are numerous alternatives. Yahoo is a convenience, not a necessity. Huge huge difference. Yahoo is not in a position to create a “lock” on anything to assure customer retention.
Microsoft spends megabucks on R&D, creating real value and more of that hard asset called intellectual property which creates REAL market value. As a media company (read their S1), Yahoo assembles links to others properties, with no substantial technology value add, and only minimal editorial value add. As a result, their total assets remain below $200 million (now THAT justifies a $19 billion market valuation right?) Can you find any other company of any type with a similar ratio?
Microsoft, above all else, has built a successful manufacturing business. Former president Jon Shirley's legacy is the efficient operations infrastructure that permitted Microsoft to enter, process, and ship over 40,000 worldwide orders per DAY back in the early to mid 90's. (over twice that now). Their revenue streams come from the direct sale of real product to “locked in” consumers.
How can anyone compare that to Yahoo's uncertain indirect revenue model that comes from advertising in a medium that reaches only 27% of US Households? … and under 10% of households in other countries? … in a medium where the ethereal user can come and go with no investment, and where the effectiveness of the ads is un proven? (When was the last time YOU clicked through a banner ad and bought something? – how many of YOU have ad blocking software installed? – ad blockers are the fastest growing Internet utility category)
From thestreet.com (couple weeks ago when Yahoo was merely a $12 billion bubble)
Paul Noglows, an analyst at Hambrecht & Quist, who downgraded the stock in July based on valuation. (Noglows, a TSC columnist, has no underwriting connection with Yahoo.) "I just don't feel comfortable putting people into the stock at these levels," he says. "The question becomes, Should you be buying Yahoo at any price?" Nonetheless, he is expecting revenues of $45.6 million and profits of 10 cents per share, slightly ahead of the consensus.
(At this time, Yahoo had a market cap of about $11.7 billion -- nearly 45 times some analysts' calendar 1999 revenue estimates of $265 million.)
Chris Rahbany, an analyst at Chatfield Dean, initiated coverage of Yahoo on Sept. 23, with a short-term reduce rating based on valuation. Yesterday he backed up that call: "No company," says Rahbany, "is worth 300 times earnings."
FOR 1999, current earnings forecasts range from 46 to a one analyst's high of 90 cents. Suppose Yahoo blows it out to $1.00. That means today's value is 165 times the most optimistic next years earnings, and over 350 times trailing earnings. Bollux!
HOW ABOUT VALUE PER “USER” ?
From Oct 12 Internet World – when Yahoo was a mere $10 billion bubble:
Valuation of Yahoo by MecklerMedia, WEBDEX leading internet analyst has Yahoo valued at $410 per “user”
Ranked by number of users August 98 reported “Users” Market Cap (As of Oct 7) Company Market Value per user
Company "Users" Market Cap Value / user
1) Yahoo 26.1 million $10.7 billion $410
2) AOL.com 21.8 million $3.1 billion $138
3) Microsoft/msn 19.6 million $2.5 billion $127
4) Lycos 17.6 million $1.0 billion $ 57
5) Excite 16.6 million $1.9 billion $104
6) Netscape.com 16.3 mil $1.8 billion $ 86
Now given that AOL offers a real service (ISP) which requires a credit card and real (not fictional) name and address, what makes Yahoo's $410 value per user over three times as high as AOL's $138 (and by today's further inflated Yahoo and AOL prices, we're talking over five times higher)? NOTHING but self promotion, low float, gullible speculators heading for the cliffs, and the Market Makers leading them there.
YAHOO PRICE TO SALES:
Others on this board were recently talking about price to sales ratios –
YHOO fully diluted shares = 114.456 million
YHOO closing price = 151 3/8
YHOO fully diluted market cap = $17.325 billion
YHOO TTM sales = $150.1 million
YHOO P/S = 115!
From Reuters:
"With Yahoo!, you can't measure things like price to sales," says Abel Garcia, senior vice-president at investment firm Waddell & Reed Incorporated, one of Yahoo!'s largest shareholders. "You have to look at it as the new media company of the 21st century." As of August 25, 1998, the NASDAQ stock market investors' capitalization valued Yahoo! at an incredible $11 billion - more than health-care giant Humana, cosmetics queen Estee Lauder, truck-rental giant Ryder System, Apple Computer, Circuit City, Dow Jones Incorporated, Knight-Ridder Incorporated or Maytag. At the time, the stock price was 305 times projected 1998 earnings of 32 cents per share - astonishing, considering that Microsoft Corporation, the computer industry pacesetter, is valued at 52 times earnings. …
So tell me fellow Silicon Investors. When I'm told by one of Yahoo's largest shareholders to “look at it as the new media company of the 21st century”, how am I supposed to translate that drivel into measurable sustainable value? Media companies are not known for high multiples – they typically operate on shoestring margins. Top quality is important, but even the venerable New Yorker has been teetering on the brink. Comments like this are just more hype from an un-informed financial type with a lot to gain … but I don't contest that just because Mr. Garcia has more money than sense, he's not a factor in Yahoo's valuation… until he decides to take his profits and move onto the next darling while waiting for the next century to arrive. Will you be among those who fund his next Mercedes?
The NET as an AD Medium – Uncertain at best.
By Andrea Orr
PALO ALTO, Calif., Nov 3 (Reuters) - Although advertising on the Internet is becoming a popular promotional tool for more and more businesses, online advertising rates are actually going down, a new survey shows.
Internet advertising rates in September fell to their lowest since last December, when it started tracking such data, the software company AdKnowledge said Tuesday.
AdKnowledge, a Palo Alto, Calif. business that makes online advertising software, says the dip partly reflects a surplus of online space relative to advertiser demand. In other words, the number of businesses advertising online is growing, but the number of Web sites that are looking for advertisers is growing faster.
Online advertising is the primary source of revenue for many Internet businesses, including popular directories like Yahoo! Inc., which do not sell any products to consumers but offer ad space on their Web sites. One strategically placed "banner ad" running along the top or bottom of a popular Web page can be seen by millions of viewers in a single day.
Still, the failure of advertising rates to show any substantial rise during a time when Internet use has exploded, could suggest businesses are getting smarter about the value of online advertising, rather than just throwing money at the Internet.
"Rates may have been artificially high to begin with," said Michele Schott, director of marketing communications at AdKnowledge. "I think everybody is just feeling their way."
The survey showed Internet advertising rates in September fell to $36.29 CPM or cost per thousand. Online advertisers pay the host site a rate based on every thousand times their ad is seen.
The September rate compares to $37.84 CPM last May, and $37.21 CPM last December.
AdKnowledge officials cautioned against reading too much into the average advertising rates, since they fluctuate widely from site to site. It said certain technology and computer Web sites were commanding CPM rates of more than $75, while other lesser-known sites sold ads at a CPM of less than $1.
Travel-related Web sites showed a sharp increase in ad rates over the past few months. CPM on sports sites was little changed, and shopping sites showed a slight decline. / end quote /
Unused ad inventory is rising. Yahoo is scrambling to make up short falls by quintupling rates charged to their financial partners for a “button” on Yahoo – from $2 mill to $10 million. The partners are understandably pushing back. Joe stockbroker can do a LOT of advertising, web-site and brand building for that kind of money, and the click through rates from Yahoo are just not paying off. AOL has had the same problem with their $25 million for 2 years “button on AOL” prices – the big guys like Quicken.com, Charles Schwab and Fidelity who can afford to pay that kind of money have told AOL to go pound sand, and the smaller guys like Ameritrade struggle to pay that money… so they try it for a year and learn the hard way that it is a losing proposition. (Ask Ameritrade's CEO Mike Anderson how many new accounts he has to sign to pay for that AOL button!)
…and in the December 1998 issue of Red Herring, you can read of the growth of Vertical Portals. “In the coming year, online retailers will look for marketing alternatives that are more effective and more reasonably priced than partnerships with the portals. These vertically oriented sites will license or produce content that is tied closely to the products the retailers wish to sell. … ….executive VP of Wells Fargo online financial services group offers the best description of the distinction between the two types of sites: “A portal is something you go through to get somewhere; a destination is where you go to get something done.” “
Add to all this Microsoft's renewed commitment to the portal / directory / one-stop shop (Pete Higgins sudden departure and Ballmer's recent comments are key signs) and we're talking about the real 800 lb gorilla, ($20 billion in cash in the bank, not inflated share value, a locked up customer base, ability to deliver a browser that defaults to their Portal etc.) going right after the web services segment. Netscape all over again.
SO fellow Silicon Investors, keep your heads about you. Gamble if you will and take advantage of the 20 point daily swings if you've the money and the stomach for it, but don't fool yourselves into thinking that Yahoo is a good buy at these prices.
Yahoo is a house of cards that is very good at self promotion and has published a large, cluttered web site. Nothing more. They have little in the way of Intellectual Property or any other assets, they are only profitable because they don't spend on R&D and manufacturing. Don't confuse pure speculation with the BS about “new media will pay off in 5 years”. Yahoo offers a useful directory to the web. This has created their most valuable asset: a brand identity that might justify a $30-$40 per share value, (though three very large well capitalized suitors passed Yahoo over last April as way too expensive at a split adjusted price of $24 / share.) This bubble will burst. Over 30% of the limited float is Institutional owned and their program triggers are cocked and ready to take profits. Take your profits now – there's a war brewing in the middle east. You'll have the chance to buy back into the game on the next cycle. Don't be at the party when the lights go on! |
