Yahoo! – 8 April 1999
3
The company rolled out three more international
properties in Q1--which makes 18 in all. We believe that
in the next year or so, the growth rate of new Internet users
in the U.S. will slow from more than 100% annually to
30%-40%. International growth, however, should remain
exceptionally strong, and Yahoo! is ideally (and uniquely)
positioned to benefit from this (the international operations
of most of Yahoo!'s competitors are joint ventures, which
means that when the entities begin generating profit, the
U.S. shareholders will own only 50% of the profits.
Yahoo!, on the other hand, owns most of its international
properties outright). The company currently operates 18
international Yahoo!s, 14 of which it owns one hundred
percent of. Although it currently generates less than 10%
of overall revenue from international operations, it likely is
investing more than 10% of its overall expenses to develop
these properties. Therefore, when the international revenue
begins to ramp, (only a matter of time, we believe), the
company should benefit from both new sources of revenue
and additional operating leverage.
Tepid pageview and revenue growth at Geocities is
probably okay. Geocities Q1 revenue was essentially flat
sequentially $7.8 million versus $7.5 million) and
pageviews increased a relatively paltry 15% to 61 million.
Although we aren't thrilled by this (we would prefer that
Yahoo! be merging with a fellow-rocketship instead of a
relative tug-boat), we are reasonably comfortable with it.
Geocities management reported that it did not sign several
potentially large, 12-month revenue deals because 1) the
announced acquisition is causing market confusion
(advertisers are waiting out the transition), and 2)
management's focus has been on the merger. Similarly,
pageview growth was likely hampered by the cancellation of
a major marketing campaign that would have been launched
mid-way through the quarter. We continue to believe that
the Geocities acquisition will be accretive by the end of
1999, and we expect Yahoo!'s management to accelerate the
company's growth in the second half of the year.
n Key Metrics, Review of Thesis
The fundamental outlook for Yahoo! and the industry
remains outstanding. We estimate that online advertising
alone is currently a $1.7 billion business, going to $10
billion in five to seven years; Yahoo! currently has
approximately 13% of this market.
Given the strength of the company's franchise and brand,
we believe Yahoo! will at least maintain and probably
increase market share over the next several years. If so,
this could translate into $1-$2 billion in revenue in five to
seven years. At a 32% net margin, $2 billion in revenue
would yield EPS of about $3.00.
Since going public in 1996, Yahoo! has demonstrated its
ability not only to maintain but also to build on the power
and reach of its industry-leading brand. We believe it is
rare indeed to find a company with the combination of 1)
an extremely compelling market opportunity; 2) a business
model with the power to generate 45%-plus operating
margins; 3) a strong management team; and 4) major
barriers to entry created by the ownership of an industry-leading
brand.
n In Our View The Top 10 Reasons to Own
YHOO
1. Company consistently exceeds expectations
2. Superb management team
3. Market opportunity appears to be enormous and
outlook continues to improve
4. Stock is difficult to value precisely, so hard to prove
it's “overvalued”
5. Internet is a world-changing economic trend, so
investors must be involved
6. Stock has always been “expensive”— valuation is a
lousy performance indicator
7. No technology product cycles, no Y2K issues, and no
inventory risk
8. Recent investments by big media companies validate
space
9. Recession-resistant sector, in our view
10. Cool name
[YHOO] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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