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Yahoo Is Successful, Profitable -- And Overpriced

Yahoo continues to prove Internet naysayers wrong.

By continually posting quarterly net profits and beating analysts' estimates, as it did again Wednesday, Yahoo has shown that a pure Internet company can thrive on the same terms as more traditional businesses -- that is, by bringing in more money than it spends.

Even more notably, Yahoo offers proof that an Internet company relying primarily on advertising revenue can be profitable.

The portal giant on Wednesday reported net earnings of 14 cents per share for its third quarter, which ended Sept. 30, smashing consensus estimates of 9 cents per share.

Even with merger and amortization costs, Yahoo remained in the black in Q3, posting a net profit of $14.9 million, or 5 cents a share, on revenues of $155 million. So there are no asterisks here.

Other metrics also show impressive growth. The number of registered Yahoo users increased from 65 million in June to 80 million in September, with unique users up from 80 million to 105 million in those same months.

The number of advertisers buying space on Yahoo Web properties rose from 2,700 in Q2 to 3,150 in Q3.

In the portal race -- if you exclude AOL, which employs a different business model -- Yahoo is the runaway winner. With a market capitalization of $35.9 billion, Yahoo dwarfs competitors such as Lycos ($5.6 billion), Infoseek ($2.2 billion) and InfoSpace.com ($2.1 billion).

For investors, this poses a problem. Yahoo -- the clear market portal leader and the only company in the sector making a profit -- remains overvalued, trading at 96x trailing 12 months (TTM) revenue.

In contrast, Lycos is trading at 42x TTM revenue and Infoseek at 18x (InfoSpace.com is a pricey 115x TTM sales). And newer portal entries such as About.com (44x estimated annual revenues) and LookSmart (60x estimated annual revenues) also are better values based on revenue multiples.

Closing Wednesday at $175.75, Yahoo stock is trading closer to its 52-week high of $244 on April 6 than its 52-week low of $48.75 recorded exactly one year ago.

Yahoo is trying hard to grow into its lofty valuation, adding numerous services in recent months that have fueled the increasing traffic growth. But an investor buying YHOO shares at current prices may have to wait some time for the kind of payoff one expects from investing in an Internet superstar.

It's likely that Yahoo's stock price will come down to reflect the company's true value faster than revenue can grow up to that value.


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