By CrossProfit
04/01/2007
Though Yahoo! is not a verb it is definitely a household word. There is no question that Yahoo! was asleep at the helm allowing the social networking and online video trends to cruise by.
Yahoo! is still number one in display advertising revenue. Yahoo! holds second place after Google in online search yet is ahead of MSFT, TWX and IACI. Panama should increase revenue in both display and search categories. We don’t think that Panama is meant to restore search click status and essentially Yahoo! is content with second place in this category. Panama’s market penetration will be assessed in Q4 2007. By then we will know if Yahoo! has succeeded in reversing the decline in margins and earnings as well.
Revenue growth was in-line with overall internet advertising growth rate for 2006 so we don’t understand what our colleagues are complaining about. It is true that 2005 saw phenomenal revenue growth, but even the best party eventually comes to an end. In the not so distant future, Apple (AAPL) and Google (GOOG) will most likely get equal treatment.
2006 was not a good year. Number crunching aside, MSFT pulled its sponsored search partnership with Yahoo! and is now a competitor. Yahoo! can expect increasing competitive pressure from the three musketeers.
We can not give an EPS estimate as we are unable to gauge Panama’s influence. At best a guestimate would lead to a lower share value based on possible if not probable revenue growth. Using 15% revenue growth for 2007 and 2008 we don’t see how a ttm multiple of 60 is justified. Even the most optimistic forward earnings estimate would render a $30.00 share price.
AT&T (T) is a major partner contributing about 0.03 to EPS. AT&T and Yahoo! are renegotiating the existing agreement and not a future agreement to commence in 2008 as was widely reported. The outcome of the negotiations is unknown and probably will not be publicized after conclusion. The reason is; whatever the deal, if revealed, other broadband customers will demand equal treatment regardless of size. This trend however spells bad news for the entire internet industry as customers will eventually play one portal against the other. Such is the nature of competition.
We believe that there will be further pressure on margins for the remainder of 2007. Panama might contribute a 15% or even 20% revenue increase; however, earnings will most likely be flat. We arrive at a CrossProfit evaluation line of $28.00. EOL is $28.00 as well. Currently Yahoo! is slightly overvalued.
Disclosure: no conflicts.
CrossProfit
Top Gaining Stocks
Top Losing Stocks