RealTime IT News

A Stumbling Giant

This one was a punch to the gut.

For the past year Internet investors have endured a meltdown in stock prices and a relentless barrage of earnings warnings, layoffs and bankruptcies. But even those 'Net bettors who long ago shed their last vestiges of naivete were shaken by the news from Yahoo Wednesday.

Sure, it has visibly struggled along with other Internet companies in the face of our slowing economy. Yet Yahoo still has been widely regarded as one of the few pure plays that would emerge from the other side of the downturn battered but intact. Indeed, the only real question for investors in the past two years has been whether Yahoo shares were overpriced.

They were, of course. Now, however, in the wake of a stunning double announcement Wednesday regarding disastrous Q1 revenues and the departure of long-time CEO Tim Koogle, the questions about Yahoo turn to issues of long-term viability.

Yes, it may be that serious, and you can expect a selloff frenzy when the Nasdaq opens Thursday morning. YHOO shares were down about 15% in after-hours trading Wednesday and in Europe early Thursday. A 20% one-day loss wouldn't surprise me, and street talk about a merger with a large entertainment company surely will intensify as Yahoo's market capitalization ($10 billion and falling) shrinks.

Trading in Yahoo shares was halted within minutes of the market's opening on Wednesday - with shares at $20.94 - after the company said it was prepared to make a major announcement. But investors had to wait until after the closing bell to find out the highly regarded Koogle was stepping down as CEO (though remaining as chairman) and that the company expected revenues of $170 million to $180 million and a break-even performance in Q1. Compared to the $232.6 million in sales and 5 cents per share net profit forecast by analysts, this is a huge shortfall.

Besides having to find a new CEO, Yahoo faces the formidable task of trying to transition away from its heavy reliance on Internet advertising revenue. It won't happen overnight, and there's no guarantee Yahoo will do so successfully. The Internet graveyard is littered with companies that attempted to shift the focus of their businesses. While Yahoo has resources and cash reserves few other 'Net players can match, this is more about execution than size.

Further, while Yahoo draws more traffic than any other Web property - unique users totaled 180 million in December alone - it's a general-population audience. Many potential advertisers instead are looking for targeted audiences, which provide a better return on their investment and allow the ad sellers to charge higher rates. That is where Internet advertising is headed.

Yahoo is expected to report Q1 results on April 11. If the company is smart, it lowballed estimates given on Wednesday. If not, and if actual results fall short of the latest numbers - a net loss, say - things will get uglier for one of the Internet's early success stories.