|Stocks To Short?
Frodar is a regular AOL member, and also a participant in our AOL Shorting
Stocks folder. Frodar has an MBA from Stanford and has had success with shorting
Netscape (Nasdaq: NSCP) and Einstein/Noah Bagel (Nasdaq: EBNX). Lest we think
Frodar is perfect, he admits being short Florida Panthers (Nasdaq: PUCK)
at $19.75. The stock currently trades at $26.
Yahoo! Inc.(Nasdaq: YHOO)
3400 Central Expwy., Ste. 201
Price - $32 1/8
With a billion-dollar capitalization and $9.5 million in revenues last quarter,
Yahoo's valuation is clearly rich. In fact, its market cap is more than half
of industry titan Netscape's. Traditional stock analysis indicates the share
price is lunacy, but because this is the Internet, all bets are off. Those
who are buying the stock believe in the most blindly optimistic future for
this company, and may well be ignoring the challenges Yahoo will face.
Yahoo's business is selling advertising space on its web pages. It attracts
viewers by providing news and information. The fundamental problem with this
business is that competition will be intense, and there is already an abundance
of inventory. Similar sites are aggressively advertising (on television,
no less!). ESPN, CNN, MTV, and push services like Point Cast are also hoping
to find Internet gold. All of these companies have a perishable inventory,
the size of which greatly exceeds foreseeable demand. With virtually no switching
costs for advertisers, the price of this commodity will be driven down by
But competition isn't the only threat Yahoo will face. Netscape has already
gotten $30 million in revenue guarantees for allowing the Netscape Guide
by Yahoo. To the extent that Yahoo is successful, Netscape can charge whatever
it wants to continue this arrangement. The words "Netscape Guide by Excite"
describe Netscape's negotiating position in a nutshell.
Yahoo bulls may say that as the Internet grows, they'll have more inventory.
But Yahoo can't sell all they've got, and revenues only grew by $1 million
quarter to quarter. Bulls may say that Yahoo has a great brand. But buyers
don't care about brand. They are buying commodity clicks. Bulls may point
out all the investment Yahoo is making in developing city specific cites,
and services like Yahooligans. But those are expensive to develop and maintain,
and still provide those commodity clicks. Readers of Yahoo's most recent
10-Q know that Yahoo is planning to increase spending significantly. Will
the revenues really materialize to justify the cost?
For Yahoo to be worth a billion dollars, they will have to prove that they
can sell tens of millions of dollars in ad space each quarter, that their
operations can be profitable, and that their brand can insulate them from
competition. This is unlikely to happen for the reasons stated above.
The future I see is investor disenchantment as costs grow too quickly, revenues
grow too slowly, and profits remain elusive. Any one of a dozen scenarios
could kill this stock, including a consumer switch to push technology, a
price war, advertisers preferring more targeted web sites, or Netscape raising
Yahoo is currently trading in the low 30s. In my opinion, if everything goes
well for Yahoo, it is worth less than half that. Yahoo trades at more than
30 times annualized revenues of last quarter, and should trade at a revenue
multiple of less than 10. I plan to close or reevaluate my short position
when the stock hits 15.
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* This column represents the opinion of one Fool and in no way should
be taken as the opinion of either the Motley Fool, Inc., the company in question
or representative of anyone or anything else other than that specific Fool's