Yahoo! Earnings Play Second Fiddle To Other Issues (YHOO, GOOG, MSFT, TWX)

Yahoo Inc. (NASDAQ: YHOO) is set to report earnings after the close.  First Call has its Q3-2008 estimates at $0.09 EPS and $1.37 billion in revenue.  While earnings would seem to be the main focus, there are many side-bar items to keep in mind.

First Call has estimates pegged for current quarter at $0.14 EPS on $1.51billion in revenue.  Theseestimates just seem too high.  The numbers have beentaken lower and the revenue expectations are even lower than juston Friday.  But the sequential gain expectation seems too highconsidering that we are entering a harder time for onlineadvertising in a soft economy.  Throw in missed opportunities frommanagement and a world that wants to direct 50% to 75% of its efforts toGoogle, and you have a recipe for disastrous earnings missing analysts’ forecasts.

Also to consider is the amount of revenues which are trafficacquisition costs, which are excluded from revenue estimates.

The other problem with considering these Yahoo! expectations isthat the company’s review is expected to cut 3,000 jobs.  That just does notresonate of any major recovery nor of any explosive growth story.  Atwhat point can you no longer milk more productivity from employees who are already working hard and angry over their options being being buried and over thelooming threat of layoffs.

Jerry Yang is up against a wall and he is dug in deeply, andshareholders have to worry about which decisions are going to be made.That is another embedded risk in the stock right now.

The Google (NASDAQ: GOOG) search deal is now on hold for regulatoryreview.  The Microsoft (NASDAQ: MSFT) deal is long gone, or is it justdead as far as anything north of $30.00?  There are rumors and storiesgalore that the company has been close to a deal with Time WarnerInc.’s (NYSE: TWX) AOL unit. 

The last problem is that there are just no clear answers on any front on most issues the company faces.Yang and friends are likely to be criticized regardless of today’sresults.  Shares have traded down to 5-year lows just last week.  Ifyou factor in lower prospects for earnings ahead, there might not evenbe a clear argument that the stock is cheap on a relative basis despiteits share price being so low.

But there is one ray of hope here.  It is very possible that theexpectations and tone from Wall Street is much more harsh and much moreunpleasant than the reality there.  IF, and it is a big if, Yang canconvince Wall Street that the operations are running better thanexpected… you could see a huge rally from bargain buyers and shortsellers covering.  Stay tuned.

Jon C. Ogg
October 21, 2008