Yahoo! Wireless, B2B Plans Get Raves

By Hal Plotkin
Silicon Valley Correspondent

Several analysts who follow Yahoo! Inc. {YHOO} say that last Thursday’s closed-door session with senior company executives convinced them that the leading Internet portal is making the right moves to become a major force in emerging wireless and business to business, or B2B, markets.

“I came away from the meeting very impressed with their strategy,” says Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray in Palo Alto, Calif.

Rashtchy reiterated his “strong buy” rating on Yahoo! immediately after the company’s annual analyst gathering, saying the stock has considerable upside potential over both the short and long term, despite a recent dip.

“I believe gross margins will be expanding this quarter as international revenues ramp up,” Rashtchy adds. The conclusion is based, he says, on the fact that just 15 percent of Yahoo!’s revenue came from the international side during its most-recent first quarter, despite the fact 33 percent of Yahoo!’s advertising and business partner clients are now based outside the United States.

Analyst Opinions
Strong Buy 16
Buy 12
Hold 3
Sell 0
Strong Sell 0
Source: Zack’s

Last Thursday Yahoo! announced a major deal with Telecom Italia Mobile {TIM}, Europe’s largest mobile network operator, to provide a comprehensive set of Yahoo! content to the firm’s more than 20 million wireless customers.

The company had previously announced similar arrangements with leading wireless telecom companies in Canada, Finland, Germany, Hong Kong and Norway, as well as with U.S. wireless carriers AT&T Corp. {T} and Sprint Corp.’s PCS Group {PCS}.

“I think there’s a lot of room for growth over the near term now that Yahoo! is solidifying its position internationally,” Rashtchy says.

Echoing the views of many other analysts, Rashtchy is equally optimistic Yahoo!’s ambitious plans in the wireless and B2B arenas will eventually pay off in a very big way.

Yahoo!’s stock has led the technology-sector roller-coaster ride since the beginning of the year, falling well below its 1999 year-end high.

One-year performance chart for YHOO

Peggy Ledvina, an analyst at Dain Rauscher Wessels, says the recent dip in Yahoo!’s stock price has created a classic buying opportunity. On Friday, she reiterated her “buy-aggressive” rating along with a $225 12-month price target.

“Despite the stock’s high valuation relative to its sector and more so, to other technology sectors, we continue to believe there will be a high level of demand for the stock given the [company’s] new initiatives and strength internationally,” Ledvina wrote.

Much of the analyst enthusiasm coming out of the meeting is based on Yahoo!’s staking out what looks like the high ground in emerging wireless markets.

“When it comes to wireless, portals are the king,” says Carl Zetie, an analyst with the Giga Information Group in Santa Clara, Calif. “I think Yahoo! has an excellent chance of being extremely powerful in that market.”

Zetie says the very nature of wireless handheld devices, whether they are cell phones or some kind of personal digital assistant, puts portals such as Yahoo! in the driver’s seat.

“The screens are very small,” Zetie says. “Moving from one Internet site to another, as you do easily with your desktop PC, is not a trivial matter. The wireless phones, for example, control where you go on the Web and what you see first. Whatever Web page you see first is going to have a tremendous advantage. Increasingly, that’s Yahoo!”

“I just don’t see any of the smaller wireless content guys or little, newer wireless portals coming out on top of Yahoo!,” agrees Callie Pottorf, an analyst with International Data Corp., based in Austin, Texas. “They just don’t have the brand name to compete with Yahoo! Yahoo! has an incredibly strong brand.”

Rashtchy says Yahoo!’s brand name is so strong that it has put the company in position to succeed with its plan to provide online portals for businesses that serve as a bridge between companies offering B2B business applications over the Internet and their target customers. Expanded B2B offerings are another key area targeted for future growth by the Yahoo! executives who spoke at last week’s analysts’ conference.

“I don’t think you’ll see Yahoo! developing a lot of B2B software for end-users,” Rashtchy says. “But what you will see are more cases of Yahoo! partnering with whoever has the best applications for businesses and delivering those services through a Yahoo! platform. It’s already beginning to happen. I know that when I come to work, I log on to My Yahoo!, not my [company] intranet portal. So this just takes that to its next level.”

“The people that own the wireless portal are very well placed to exact a toll from whatever companies use the portal to connect with customers,” Zetie agrees.

The one cloud hanging over Yahoo!’s wireless plans, though, remains a somewhat uncertain wireless revenue model. Yahoo! typically pays wireless operators to purchase a premium location on the screens of the handheld devices carried by their customers.

Several revenue-generation models are currently under consideration or being put through trial runs. They basically boil down to one of two models: Either consumers pay to purchase goods and services through Yahoo!’s wireless portal, which would allow the company to take a cut of each transaction, or the service is supported by advertisers who pump ads to the little screens in exchange for cash payments to Yahoo!

“That’s the one thing they’re still trying to figure out,” says Zetie, who says some of the advertising-supported scenarios he has heard seem a bit far-fetched.

“One idea people are talking about is that you’ll get little ads popping up on your cell phone for certain stores as you pass by them,” Zetie says. “That strikes me as a pretty silly idea. I don’t think people will put up with the intrusion. The last thing I want on my cell phone are ads that get in the way of my making calls. I think they’re going to have to come up with goods and services that have a real value that people are willing to pay for.”

Naqi Jaffery, a mobile-communications industry analyst at Dataquest in Irving, Texas, is more optimistic on the wireless-advertising front.

“I think there will be a lot of experimentation,” Jaffery says. “But I think they’ll find a way to do it. If they combine the ads with some kind of incentive, something like a coupon for example, I think people will like it. Advertising works. We know that. They just need to find the right way to do it.”

Rashtchy says he isn’t at all worried by the unsettled nature of Yahoo!’s wireless revenue model, given the success the company has already had turning its vast user base into bottom-line profits.

“I think at this point if you could own just one stock it would have to be Yahoo!,” Rashtchy says. “They are a leading global platform for delivering a wide range of services.”

“There really wasn’t anything shocking or unexpected at the meeting,” adds Andrea Williams Rice, an analyst with Deutsche Banc Alex. Brown in San Francisco. “But I did come away from it with the general sense that Yahoo! is firing on all cylinders and has plenty of momentum.”

On April 5, Yahoo! reported first-quarter earnings of 10 cents a share, a penny above analysts’ consensus estimate, as provided by First Call Corp.

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