Investing

Yahoo!: Back To $22?

Bloomberg has written an analysis of Yahoo!’s (YHOO) business prospects that is grim. The news agency makes the argument that, after losing the search business to Google (GOOG), its is losing the display ad market to social networks.

Bloomberg reports that social networking advertising will double in 2007 to $900 million, and will reach $2.5 billion by 2011. Overall display advertising will grow about 13%. “Every ad dollar MySpace and Facebook take is a dollar that in the past would have gone to Yahoo," an analyst at the Munder Fund told Bloomberg.

The Bloomberg case is almost certainly right, for now at least. Yahoo!’s shares trade at 5.5x sales. Google’s go at 14.1x.

And, that means that Yang and Decker have not time. If they cannot conclude a major purchase of a property like Facebook or forge a strategic alliance with AOL, Microsoft (MSFT), or News Corp (NWS), the company will fall further and further behind its rivals.

Most of this has been clear in the market since Terry Semel left as CEO, but the share that social networking sites are taking is display make the company’s problems more difficult by the quarter.

If management’s instinct is to solve Yahoo!’s problems by running the company better instead of through a major transaction it would not be surprising to see its shares below the $23 where they traded last October.

Douglas A. McIntyre

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