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Despite falling
roughly 40% from its 52-week high, some analysts think Yahoo!’s
stock remains significantly overvalued. If they’re right,
it could be only a matter of time before Yahoo! {YHOO}
sinks further.
Yahoo! stock
may receive a temporary boost from rumors that it is in preliminary
talks with Excite@Home about
acquiring the search directory assets of the Internet portal
provider.
But even now,
it’s hard to find an analyst who can justify the company’s
stock price based on market fundamentals like profit/earnings
ratios or overall revenue growth. Without such barometers, analysts
often point to intangible factors, like “market psychology”
to explain the stock’s high price.
The stock
went up, they say, because investors thought it would go up.
So what happens when those same buyers get spooked? The huge
swings in Yahoo!’s stock price over the last few weeks
provides at least a partial answer.
The more important
question, according to several analysts, is exactly when traditional
yardsticks of corporate performance will finally be fully reflected
in Yahoo!’s stock price.
“You
still can’t do the math and come up with an explanation
for how it’s worth [today’s price] 134,” says
Nick Moore, senior technology analyst at Jurika & Voyles,
a large money management firm based in Oakland, Calif.
The same thing was true, Moore says, earlier this year, when
Yahoo!’s stock traded at $244. When making trades, Moore
likes to stick to the basics, looking for growth companies that
trade at between 10 to 15 times revenues. In recent months,
many hot Internet stocks have been trading at ten times those
prices or even more, he says.
“At these
levels,” Moore says, “it’s all about psychology.
Market sectors get hot from time to time. We saw the same thing
happen with biotechnology stocks in the 1980’s.” In
all previous instances markets have settled down once a new
industry outgrows its initial hypergrowth phase.
“There’s
still plenty of bubble left,” agrees James Preissler, an
Internet Analyst at PaineWebber. Yahoo!’s current price
level “still reflects very high expectations. The company
would have to grow for 10-15 years at a 30 percent compounded
rate to justify its current price. That looks like a pretty
big leap of faith to me,” he says.
To be sure,
there are good things to say about Yahoo!’s recent performance.
Yahoo!’s
One-Year Stock Performance
The
company posted revenues of more than $115 million dollars for
the second quarter this year, with net income of $0.11 cents
a share. That is, as long as you exclude merger-related charges
for GeoCities, Online Anywhere, and Encompass, Inc.
But it’s
precisely those mergers, and similar acquisitions and diversification,
that present Yahoo! with its biggest challenge.
Companies
often experience at least some difficulty integrating new operational
divisions, even when they do them one at a time. Yahoo! has
been adding new lines of business at a fever pitch.
Recently,
for example, Yahoo! announced several new marketing relationships,
including one with Alloy Online, Inc., targeted at generating
revenues from the teen market.
Alloy’s One-Year Stock Performance
Yahoo! also
inked a similar deal last week with the Global Vacation Group
aimed at higher-income travelers.
Yahoo!’s
strategy is pinned on increasing traffic to its site and driving
visitors to its marketing partners in virtually every conceivable
industry—from financial services, to travel, to employment
agencies, to real estate.
But the question
investors should ask themselves is: What are the chances, over
time, that Yahoo! will turn out to have picked the right marketing
partners in enough different vertical markets?
What’s
more, Yahoo!’s diversification strategy could lead the
company to take its eye off a ball that is even more vital to
the company’s future: maintaining a comprehensive, useful,
and competitive online directory.
In the years
ahead, protecting Yahoo!’s core business is going to become
an even more difficult task now that dozens of other companies
are investing heavily to build their own Yahoo!-like online
“portals.”
Even Merrill
Lynch’s usually bullish Internet analyst Henry Blodget
says that at some point Yahoo!’s valuation will be more
closely linked to its performance.
When? “It’s
hard to know,” Blodget says. “It’s possible we
are beginning to see that happen now. But it is also possible
that [Yahoo!] could be subject to sentiment for a long time,
as all stocks are.”
For the record
though, Blodget remains optimistic about Yahoo!’s potential,
particularly over the fourth quarter. “This is just a typically
volatile slow summer season,” he says. “We saw the
same thing happen last summer and the stocks came right back
up.”
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