Should the Drip Port Yahoo!?

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By Vince Hanks
May 18, 2000

The world of direct investing took a significant step forward in early April when the Internet's preeminent brand name, Yahoo! (Nasdaq: YHOO), announced plans to sell its shares directly to the public. This is the first purely Internet-oriented company to offer its shares for direct sale and could easily blaze a trail for others to follow. The offering of Yahoo! SharesDirect further opens the gateway of possibilities for the small, individual Drip investor, making accessible shares in a company that is revolutionizing media, commerce, communications, and community.

The proposed details of the Yahoo! SharesDirect are as follows:

  • Minimum initial investment of $250, plus a fee $5
  • Optional cash purchase (OCP) range of $50 to $150,000 per year
  • Shares are purchased twice weekly
  • Optional cash purchase fee of $5 (or $2 if made via automatic debit), plus 5 cents per share
  • Selling fees are $10, plus 12 cents per share

Although Yahoo! is planning a direct investment plan, investors may be better served using what we call a Pseudo-Drip because of the steep fee schedule, as you can see. Let's take a closer look at the company itself.

Yahoo! is a global Internet media company that offers a network of branded Web services and programming to over 145 million individuals each month, up from 110 million in December 1999. Yahoo! offers customizable services in 21 countries and 12 different languages, with non-U.S. sources accounting for 40% of its user base. Revenues for its most recent quarter ended March 2000 rose 120% to $228.4 million, compared to the same period last year. Net income reached $77.9 million, up from $1.8 million. Trailing 12 month sales and earnings rose 170% and 224%, respectively. Net margins sit at a lofty 18.4%

Last week, Jeff imported the Flow Ratio from the boys in Rule Maker land. I'm a big fan of the Flowie, as I love companies that hoard cash and loathe to let it slip through their grubby little mitts. To review, a Flow Ratio of less than 1.25 is desirable, meaning cash is flowing into a company at a better clip than it is flowing out. The formula is as follows:

                   (Current Assets - Cash)
Flow Ratio =   ------------------------------
               (Current Liabilities - ST Debt)

Running Yahoo! through the Flow Grinder, we come up with:

                      (1,072m - 992m)
Flow Ratio =   ------------------------------
                         (235m - 0)

Flow Ratio =                0.34

No bones about it, Yahoo! is near flawless in its cash management. Zero debt, long or short term, and it's holding on to its cash very tightly, paying it out more slowly than it is taking it in. For comparison's sake, here are some recent Flow Ratios of other technology companies:

Intel (Nasdaq: INTC):             0.93
America Online (NYSE: AOL):       0.86
Microsoft (Nasdaq: MSFT):         0.40
Cisco (Nasdaq: CSCO):             0.87
Nokia (NYSE: NOK):                1.19

Needless to say, Yahoo! is currently the cream of the crop when it comes to cash flow. It is also making the grade when it comes to profit margins, earnings and sales growth, a strong balance sheet, and top-notch leadership. The big question now is, are all these things sustainable? We'll address that next week and look a little deeper into Yahoo!'s business, but in the meantime, I'll pose the question to you, Foolish readers: Should the Drip Port take a serious look at Yahoo!? Tell us why or why not on the Drip Companies message board.

Drip Portfolio

5/18/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP-3/4-2.56%$28.50
INTCINTEL CORP3/40.61%$123.94
JNJJOHNSON & JOHNSON7/161.65%$88.50

  Day Week Month Year
To Date
Drip .78% 5.32% 2.66% 20.47% 56.51% 17.29%
S&P 500 -.73% 1.14% -1.05% -2.18% 53.09% 16.37%
S&P 500(DA) -.73% 1.14% -1.05% -2.18% 55.72% 17.08%
S&P 500(DCA) n/a n/a n/a n/a 24.92% 8.24%
NASDAQ -2.91% .27% -8.34% -13.04% 125.46% 33.56%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg

Trade Date # Shares Ticker Cost Value LT $ Val Ch
  Cash: $0.01  
  Total: $5,626.45  

• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.