RealTime IT News

Still Upbeat About Yahoo?

By David Miller

When Yahoo failed to satisfy investors' appetites for earnings on Tuesday, despite meeting analysts' expectations, the market responded with a flurry of tech sell-offs and gloomy forecasts about the near future for tech stocks.

But on Wednesday most analysts called the response an overreaction while warning that earnings optimism seems to be factored too strongly in valuations for tech companies.

Late on Tuesday, Yahoo posted quarterly results that came close to meeting the 17 cents a share that Wall Street expected. The Sunnyvale, Calif.-based Internet company also reported its fourth-quarter profit had nearly doubled.

"Yahoo showed strong revenue growth (39 percent) and missed analysts' estimates by just a penny," said Greg Sterling, an analyst for The Kelsey Group, commenting on the 16 cents per share that Yahoo reported. "The expectations for Yahoo and Google are extremely high, one could argue unreasonably so, because of their growth histories and because they're the Internet bellwethers."

Yahoo's results, taken in combination with a disappointing report from Intel, sparked fears about slower growth in U.S. corporate profits and doubts about the current values set on tech-sector stocks.

Yahoo's shares slid more than 12 percent on Wednesday.

"After the Yahoo earnings release, people started talking about whether this signals a bubble starting to burst," said Sterling. "I don't think so, but unreasonably inflated expectations can potentially create a self-fulfilling prophecy."

Japan's benchmark Nikkei index added to the angst with trouble in its own tech stocks, after Internet start-up Livedoor was raided on Monday evening in response to allegations that the company violated security laws by concealing a 1 billion yen ($8.7 million) loss in its 2004 annual report.

Billed as "Livedoor shock" by the Japanese media, Nikkei was forced to close 20 minutes early on Tuesday as a flurry of selling threatened to overwhelm the exchange's computer systems. Transactions had reached transactions reached 4.3 million, near the system's limit of 4.5 million.

Most analysts say the tech sector isn't in for a sustained freefall. It points to over-enthusiastic expectations and Yahoo's seeming failure to make the most of the thriving paid search advertising market as reasons for the company's less-than-thrilling Q4 results.

That said, analysts also note that Yahoo has a broader array of assets than Google, specifically in the content, display advertising and brand inventory.

It remains the No. 2 player in search behind Google, and the No. 1 player in terms of overall traffic.

On Wednesday, tech investors were looking ahead to Google's Q4 report, scheduled for Jan. 31, which could be the real test for tech stocks. Dazzling figures from the company could be seen as a sign that the technology industry as a whole is alive and well.

But a dark fin of fear is now surfacing. If Google doesn't thrill the crowds, expect to see tech stocks take a steep dive.

"I don't think the expectations for Yahoo were out of hand, but I think they may be for Google," Citigroup analyst Mark Mahaney said on Wednesday.