Yahoo! – 11 May 1999
2
Company Update
Buying opportunity. Yahoo! is one of the highest-quality
companies in the internet industry, and its stock is a core
holding in our model internet portfolio. Given the stock's
extreme volatility, it obviously makes sense to buy it on
dips—and at $150 it has dipped significantly from a high
of approximately $240 a month ago. The stock usually
tends to weaken in the middle of the quarter, then run up
prior to the earnings conference call, which usually takes
place a week after the end of the quarter. The second
quarter is usually a seasonally strong one for advertising in
general and Internet advertising in particular, and we
expect that Yahoo! will post strong Q2 results.
GCTY and BCST acquisitions set to close on schedule.
Yahoo! expects to close the Geocities acquisition on
schedule at the end of May (May 28). Because of
significant duplication between the two companies' work
forces, we expect that Yahoo! will be able to quickly
realize numerous operating synergies, allowing it to render
the merger immediately neutral to earnings, as planned.
Our model has already been adjusted to account for the
Geocities transaction, which will be accounted for as a
pooling. The company still expects the Broadcast.com
acquisition to close in August (and possibly sooner,
depending on the SEC's review process).
Yahoo! is not seeing pricing pressure. Over the last
several months, we have consistently heard reports of
downward pricing pressure in the internet advertising and
sponsorship markets. We believe that there has been some
erosion of pricing in two places: 1) low-end, untargeted,
run-of-site advertising, which now routinely sells at CPMs
below $5, and 2) at second and third-tier sites, which have
to compete on price. Although these two factors may be
causing the average industry pricing to trend downward,
we believe that the pricing of high-end inventory (highly
targetable pageviews) at the premium properties such as
Yahoo! is remaining stable—or even increasing.
Consequently, we are not especially concerned about
pricing pressure affecting Yahoo!'s margins or business in
the near-term.
Q2 advertising trends appear strong—and Q2 is a
seasonally strong quarter. Advertising is a seasonal
business and Q1 is a seasonally weak quarter. Even
considering this, however, the growth of online advertising
revenue in Q1 was underwhelming: the majority of
companies experienced flattish sequential quarters, and a
few were even down sequentially. Q2 is a strong seasonal
quarter, and based on conversations with various
companies in the industry, we expect sequential growth in
Q2 to be significantly stronger than that in Q1.
Impact of AT&T's recent deals. Yahoo!'s response to
competitive threats has always been to maintain a “high
level of paranoia,” and it appears that the company is
doing this in regard to AT&T's recent acquisition of
Mediaone and set-top deal with Microsoft. This said,
Yahoo!'s greatest strength is that it is access-agnostic, and
is not dependent on any one technology over which to
deliver its service. Because of the multi-technology nature
of internet access, we believe it would be a mistake for any
access vendor, whether telecom, cable, satellite, or
wireless, to limit the content accessible over its service.
As a result, we do not expect the AT&T deals—or any
other similar deals, for that matter—to impinge on
Yahoo!'s market opportunity.
Progress of Yahoo! auctions. For perhaps only the
second time in its history, Yahoo! appears to be losing
market share in a particular business category—auctions
(the first time was in e-mail—Microsoft's Hotmail is
making a chump out of every other competitor in the
industry, including Yahoo!). Even though Yahoo!'s
service is free and the industry leader eBay's isn't, eBay
appears to have maintained its dominant lead over Yahoo!
and the rest of the industy over the last quarter. The good
news is that Yahoo! appears to be the number two player
in auctions, and, depending on the day, appears to be
gaining a bit of share versus eBay (what Amazon.com's
entry into the business will do to the landscape remains to
be seen). At this point, we think the auction game is
eBay's to lose, but we still think Yahoo! has an
opportunity to carve out a nice chunk of highly profitable
auction business for itself.
The challenge of maintaining laser-beam focus in the
face of extraordinary success. Given the fact that most of
senior management's initial option grants took place nearly
four year's ago (i.e., are about to vest completely), it is
certainly easy to imagine a work-culture that has morphed
from the hyper-intense to dreamy hobbyism—crippling the
company in the progress. One of Yahoo!'s greatest
strength's, however, has always been a laser-like focus on
being the best, and we have no reason to suspect that this
has changed.
[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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