Friday, August 8, 1997

Yahoo!
(Nasdaq: YHOO)
Phone: 408-731-3300
http://www.yahoo.com
Price (8/8/97): $54

HOW DID IT DOUBLE?

Yahoo! The name of this Internet heavyweight has also been the cry of its elated shareholders lately. Thanks to a series of lucrative deals and surprising profitability along the way, shares of Yahoo! have regained the luster they had lost since last year's initial public offering (IPO). It's a tale of the not-so-little Internet search engine that could -- and did.

Its April 1996 IPO was a runaway hit. Priced at $13 per share and more than doubling at the open of trading, the stock became a media darling. Three months later, after the froth had settled and a summer correction had run its course, the stock was back down to the mid-teens. Like a web page that takes way too long too load, the stock remained stagnant for some time. Then came the deals, the profits, the buyers, and the double.

BUSINESS DESCRIPTION

Yahoo! runs the largest search and navigational site on the Internet, second only to AMERICA ONLINE (NYSE: AOL) in overall popularity. Every day its website receives about 40 million page views. According to PC Meter, Yahoo! reaches more than a third of U.S. households with online access. Yahoo! sells advertising that appears on its web pages.

FINANCIAL FACTS

Income Statement

      12-month sales: $37.1 million
      12-month income: ($0.2 million)
      12-month EPS: $0.00
      Profit Margin: N/A
      Market Cap: $1722.6 million

      Balance Sheet
      Cash: $98.9 million
      Current Assets: $109.5 million
      Current Liabilities: $8.2 million
      Long-term Debt: N/A

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 46.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Last quarter the company, in association with NETSCAPE (Nasdaq: NSCP), launched Netscape Guide by Yahoo! Back when the deal was announced on March 19, the stock could still be had for $24 a share. It was a significant partnership since it gave the Yahoo! a high-profile distribution center right on the taskbar of the most popular web browser.

There were more deals to be made, and more viable entry points. Earlier last month the stock was in the mid-$30s when the company teamed up with Internet bookseller AMAZON.COM (Nasdaq: AMZN) in a deal that would have the company's search engine link directly to the Amazon.com cyberstore whenever a book title came up.

A few weeks later, when the company reworked an online commerce agreement with Visa and declared a 3-for-2 stock split, shares were already in the $50s and the exclamation mark was fittingly in place at Yahoo!

WHERE TO FROM HERE?

Lost in the maze of strategic partnerships and new sponsors is the fact that the company has been profitable for the last three quarters. While the earnings have been marginal, they have defied the analysts who have wrongly projected deficits each and every time.

No longer skeptics, analysts now expect quarterly profits from the company. The mean earnings estimate for next year now stands at $0.49 a share.

Yahoo! is growing globally. Recent launches in Europe and Asia are helping the company extend its domestic dominance. As the company ponders the proper exploitation of its surging brand name popularity, one does have to ask if the company deserves to be valued at over 100 times estimated earnings for 1998.

The $1.7 billion market cap definitely needs some justification. Simply because its site is more popular than Netscape's and at half the market value is not enough. For starters, while Netscape also derives revenue from selling ads on its pages, it has ten times the revenues of Yahoo! thanks to the retail software sales.

Comparing Yahoo! to EXCITE (Nasdaq: XCIT) and LYCOS (Nasdaq: LCOS), the 2nd and 3rd largest search engine sites respectively, can be cruel. Each of these peers has a market cap just shy of a quarter million dollars.

While seemingly overvalued, the open-ended nature of its potential is what has made shares of Yahoo! so desirable -- and yet so volatile. Given the current valuation, it's not likely that Yahoo! will see another double in the near future.

-Rick Aristotle Munarriz (tmfedible@aol.com)

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