Yahoo! Below $20

Stocks: (GOOG)(YHOO)

As Yahoo!’s stock price sits new its 52-week low, the amount of speculation about the company’s future increases. Merrill Lynch recently raised its rating on the web company saying that the pullback in the stock price on poor Q3 earnings make the share cheap. Legg Mason has expressed its concern that Yahoo! has not been able to generate more revenue despite its total audience advantage over Google. But even Legg Mason thinks the big web company is worth more, putting its "intrinsic value" at the mid-$40 range.

But, value based on what. A lot of traffic that is poorly exploited? A management team that does not seem to have an articluated plan for improving operations? Recently, senior management at Yahoo! got a memo from one of its members saying the company was trying to do too much for too many web visitors and the the company needed to focus on fewer, better opportunities.

The New York Times has even mentioned that Yahoo! might be a takeover candidate. That would be true only if an acquirer believes that Yahoo! core problems can be solved. Most of what the company does is already duplicated at competing websites like AOL and MSN. Financial information, Video, Maps. E-mail. Instant messaging. Photo sharing. Classifieds.

Yahoo!’ facing a tough set of issues that revolve around the fact that its huge traffic still does not mean that its is differentiated in any critical way from its competitors, expect Google where revenue companies almost exclusively from text-based search ads.

If Yahoo! has another poor quarter, or if its ad revenue growth rate falls behind the industry, the stock price could drop below $20, with a risk of its dropping further.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.