Yahoo! In One Ear, Out the Other

Lehman Brothers Equity Analyst Holly Becker succeeded in making a name for
herself by taking on Yahoo! this week, one of
the only remaining Teflon Internet graybeards. The investment bank
maintained its “neutral” rating on the portal giant, while expressing
concern over the company’s future revenue numbers tied to softening
advertising sales. Shares of Yahoo! fell victim to mild profit taking by
investors who were likely looking for an excuse to take some money off the
table anyway.

The report illustrated a handful of valid points, chief among them, that of
Yahoo!’s top 200 advertisers, well over half are Internet companies. Many
of those same dot-coms are ditching costly branding campaigns while
clutching scarce remaining cash close to the vest. There’s little question
that the widespread belt-tightening by struggling start-ups could come home
to roost on Yahoo!’s bottom line.

Merrill’s chief cheerleader Henry Blodget did his usually song and dance
protecting the thoroughbreds in his stable of stocks, maintaining a “buy”
rating on Yahoo!. Over in the next cubicle, PaineWebber investment analyst
Chris Dixon reiterated his own “buy” on the stock while arguing the selling
was an overreaction to the negative comments by Lehman. Not to be outdone,
Jupiter Communications muscled its way in with a fluffy report that
estimates online ad spending will skyrocket from $5 billion this year to
$15 billion in 2005.

The entire soap opera has been played out before jaded investors who might
remember Ravi Suria’s banana peel that put on its back in June following the Lehman Bond Analyst’s
negative comments on the e-tailing giant’s suspect credit rating. Back then
Holly Becker respectfully disagreed with her colleague’s assessment, before
jumping on the bandwagon a month later with a downgrade on Bezos’ brainchild.

So the real question is whether investors should take all of this seriously
or with a grain of salt. The latter of the two is the obvious choice for a
number of reasons, some of which aren’t necessarily based on a fundamental
analysis of Yahoo!’s prospects. For starters, the blue chipper has taken
its consensus estimates out behind the woodshed for the last five quarters
straight. Whether it meets or squeaks past analysts’ forecasts in its
upcoming quarter isn’t likely to have a material affect on its stock
considering it’s one of the scant few Internet plays showing profitability.

Boasting nearly 50 million monthly eyeballs, Yahoo! enjoys the elite
distinction of getting first dibs on the lion’s share of ad dollars spent
online. I’m not suggesting that the company doesn’t have room to fall. I’m
just saying it’s unlikely to take a spill because of softening ad sales. If
I’m wrong, the entire dot-com industry would have to go to hell in a
handbasket before the Net’s list of who’s-who fall victim to the slowdown.

Maybe the strongest argument for why Lehman will end up eating crow, is
that we’ve seen slumping share prices and general distaste for the entire
Internet space since April. While fear and greed are the predominant
sentiments that drive Wall Street, a healthy dose of boredom has beset many
retail investors. Tired of waiting for a little action or the occasional
train-wreck to interrupt watching the grass grow, many investors have
simply taken their ball and gone home. But none have forgotten their taste
for sexy Net stocks or that high-tech has lately been the only game in town.

It only takes a spark to start a blaze, and I’d say the Net stocks’
underbrush is bone dry, vulnerable to break out into irrational exuberance
at any moment. I’d also say it’s a pretty good bet we’ll see some froth
grip the market before year’s end – probably sooner. This latest shakeout
has left many dot-coms beyond repair; and while the next rising tide won’t
lift all boats, it will boost the lead

ers. And weaker summer ad sales or
no, Yahoo! will be right out in front leading the Net parade. All we need
now is a match.

Any questions or comments, love letters or hate mail? As always, feel
free to forward them to [email protected].

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