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Yahoo! Struggles With Its Valuation


by Hal Plotkin
Silicon Valley Correspondent
August 3, 1999 6:02AMET


“You still can’t do the math and come up with an explanation for how it’s worth [today’s price] 134.”

— Nick Moore, Jurika & Voyles analyst

Despite falling roughly 40% from its 52-week high, some analysts think Yahoo!’s stock remains significantly overvalued. If they’re right, it could be only a matter of time before Yahoo! {YHOO} sinks further.

Yahoo! stock may receive a temporary boost from rumors that it is in preliminary talks with Excite@Home about acquiring the search directory assets of the Internet portal provider.

But even now, it’s hard to find an analyst who can justify the company’s stock price based on market fundamentals like profit/earnings ratios or overall revenue growth. Without such barometers, analysts often point to intangible factors, like “market psychology” to explain the stock’s high price.

The stock went up, they say, because investors thought it would go up. So what happens when those same buyers get spooked? The huge swings in Yahoo!’s stock price over the last few weeks provides at least a partial answer.

The more important question, according to several analysts, is exactly when traditional yardsticks of corporate performance will finally be fully reflected in Yahoo!’s stock price.

“You still can’t do the math and come up with an explanation for how it’s worth [today’s price] 134,” says Nick Moore, senior technology analyst at Jurika & Voyles, a large money management firm based in Oakland, Calif.

The same thing was true, Moore says, earlier this year, when Yahoo!’s stock traded at $244. When making trades, Moore likes to stick to the basics, looking for growth companies that trade at between 10 to 15 times revenues. In recent months, many hot Internet stocks have been trading at ten times those prices or even more, he says.

“At these levels,” Moore says, “it’s all about psychology. Market sectors get hot from time to time. We saw the same thing happen with biotechnology stocks in the 1980’s.” In all previous instances markets have settled down once a new industry outgrows its initial hypergrowth phase.

“There’s still plenty of bubble left,” agrees James Preissler, an Internet Analyst at PaineWebber. Yahoo!’s current price level “still reflects very high expectations. The company would have to grow for 10-15 years at a 30 percent compounded rate to justify its current price. That looks like a pretty big leap of faith to me,” he says.

To be sure, there are good things to say about Yahoo!’s recent performance.


Yahoo!’s One-Year Stock Performance

The company posted revenues of more than $115 million dollars for the second quarter this year, with net income of $0.11 cents a share. That is, as long as you exclude merger-related charges for GeoCities, Online Anywhere, and Encompass, Inc.

But it’s precisely those mergers, and similar acquisitions and diversification, that present Yahoo! with its biggest challenge.

Companies often experience at least some difficulty integrating new operational divisions, even when they do them one at a time. Yahoo! has been adding new lines of business at a fever pitch.

Recently, for example, Yahoo! announced several new marketing relationships, including one with Alloy Online, Inc., targeted at generating revenues from the teen market.


Alloy’s One-Year Stock Performance

Yahoo! also inked a similar deal last week with the Global Vacation Group aimed at higher-income travelers.

Yahoo!’s strategy is pinned on increasing traffic to its site and driving visitors to its marketing partners in virtually every conceivable industry—from financial services, to travel, to employment agencies, to real estate.

But the question investors should ask themselves is: What are the chances, over time, that Yahoo! will turn out to have picked the right marketing partners in enough different vertical markets?

What’s more, Yahoo!’s diversification strategy could lead the company to take its eye off a ball that is even more vital to the company’s future: maintaining a comprehensive, useful, and competitive online directory.

In the years ahead, protecting Yahoo!’s core business is going to become an even more difficult task now that dozens of other companies are investing heavily to build their own Yahoo!-like online “portals.”

Even Merrill Lynch’s usually bullish Internet analyst Henry Blodget says that at some point Yahoo!’s valuation will be more closely linked to its performance.

When? “It’s hard to know,” Blodget says. “It’s possible we are beginning to see that happen now. But it is also possible that [Yahoo!] could be subject to sentiment for a long time, as all stocks are.”

For the record though, Blodget remains optimistic about Yahoo!’s potential, particularly over the fourth quarter. “This is just a typically volatile slow summer season,” he says. “We saw the same thing happen last summer and the stocks came right back up.”

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