It has become a quarterly ritual. Portal giant Yahoo!
, hailed as one of
a few blue-chip Internet stocks, releases an earnings report showing record
revenues and profitability – and shares plummet.
In Q1, Yahoo shares fell because the company’s net profit of 10 cents per
share only barely topped analysts’ estimates of 9 cents. Before that, in Q4,
Yahoo shares were punished when the company’s net profit failed to meet
street “whisper numbers.”
This week, YHOO shares were pounded even before Tuesday’s quarterly report,
the victim of market fears that Yahoo’s revenue growth will slow and
spending will rise. Through Tuesday’s trading, YHOO fell nearly 14% from
last Thursday’s close.
Then the script changed. Yahoo’s quarterly report, released after regular
trading ended, fooled the naysayers, showing a more-than-doubling of revenue
and re-igniting investor confidence. Shares soared to $117.50 in after-hours
With net income of $74 million, or 12 cents per share, in the second
quarter, Yahoo beat street estimates of 10 cents per share with relative
ease. Meanwhile, page views climbed to an astounding 680 million per day, a gain
9% from 625 million in March.
Add all this up, and you have a true Internet success story, a company that
has built an online business model that works.
And yet, as it was when I
wrote about it last October, Yahoo remains overvalued, though admittedly
Back then, shares were trading at 96x trailing 12 months’ (TTM). Now, with
revenue of $854.7 over the past four quarters and a current market cap of
$57.3 billion, Yahoo is valued at 67x TTM revenue.
That’s expensive compared to other profitable market leaders such as America Online
, which trades
at 20x TTM revenues; eBay
, which is at 43x TTM revenues; and Cisco Systems
26x TTM revenues. And those revenue multiples will drop even lower when
those companies release their quarterlies in coming days.
Still, while Yahoo’s revenues in Q2 disappointed no one, the warning clouds
on the horizon regarding lower advertising revenue are all too real. Yahoo
has made millions charging premium banner ad rates to deep-pocketed
start-ups with aggressive marketing strategies based on intensive
brand-building. That revenue stream will decrease as cash-starved dot.coms
slash advertising budgets. So slower revenue growth going forward is a
genuine possibility for Yahoo.
Bottom line: Yahoo is a great company, but I continue to believe its stock
is overpriced. If you’re looking for a market leader, you can get another at
a relative discount.
Having said that, I’ll admit that Yahoo, so far, has proven me wrong. Last
October I wrote:
“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.”
That was in early October, when shares were trading at a split-adjusted
price of $87.88. They haven’t fallen below that mark since late October, and
have soared as high as $237.50 on Jan. 3. On Tuesday, YHOO closed at
$105.50, or 20% above its price at the time of my ill-fated prediction.
Well, I did say “likely.”