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	Dueling Fools Introduction Bull Argument Bear Argument Bull Rebuttal Bear Rebuttal Vote Results Flashback: Procter & Gamble
	Discussion Board Yahoo!

By Mike Renshaw

I'll say right from the start that I think Yahoo! is a great company. It has an efficient, highly scalable business model that produces a steady stream of earnings. Millions of consumers frequent its site on a daily basis. It has one of the most well-known names on the Web. It doesn't have any debt on its balance sheet. I think Yahoo! will be around for a long time.

So, if I think Yahoo! is such a great company, then why wouldn't I like the stock? I don't like it for a simple reason: Its price is too high relative to its future earning potential. As many investors have recently learned in a painful fashion, even the best companies can be too expensive.

Stock prices got a little wacky the past couple of years, but if you had paid attention to price, you could've avoided paying too much. The stock market is usually a "great brain," but sometimes it acts like it could use a lobotomy. We all know now that $250 per share was way too much for Yahoo!, but that's in the past. What matters now is whether $35 per share is cheap enough.

With 611 million shares outstanding at $35 a share, Yahoo! is capitalized at $21.4 billion. For the full year 2000, it reported $291 million in earnings. We could say that it has a P/E of 73.5. Then we could spend the next four months arguing over whether P/E ratios mean anything. Let's try putting it a different way that's perhaps easier to understand -- by looking at Yahoo!'s earnings yield.

If you were to invest $10,000 in Yahoo! at $35 per share, that investment would yield around $136 in annual earnings. If you were to put that same money in a simple savings account paying 2%, that $10,000 would yield $200 in interest over a year. It's hard to believe, but you can get more bang for your buck putting your money in the town bank instead of ultra-high-tech, ultra-cool Yahoo!

OK, that's not fair, because everybody knows that Yahoo!'s earnings are surely going to grow by leaps and bounds. Let's say Yahoo! doubles earnings. Then it will still yield well less than a 4% money market account. Let's say it can quadruple earnings. What you've got then is the equivalent of a boring 6% Treasury bond. More than that? Then it might be able to yield as much as a stodgy old-era company. And, that's only if the stock stays at $35 per share! If the stock price goes up, its earnings will have to increase even more.

I need to be convinced that Yahoo! is going to have a pretty fantastic future before I would pay $35 a share for it. Yahoo! will have a very difficult time tripling its earnings to justify its current stock price. According to Yahoo!'s own guidance, earnings are expected to decrease next year. Yahoo! was one of many 'Net businesses benefiting from manic capital markets that provided easy money. Newly public companies spent outrageous sums of money on advertisements, and much of that went to Yahoo!

Now that the 'Net bubble has burst, the 'Net advertising market is in a serious slump, as you can read in any of dozens of articles appearing in the past few weeks. The 'Net advertising market is a classic example of the artificially high levels of demand that bubbles can create. The inflated levels of growth of the past two or three years were projected indefinitely into the future to justify the outrageous price of Yahoo!'s stock. Now that Yahoo!'s earnings growth has slumped, all those growth models will have to be recalculated. One end result is that the power of compounding cuts both ways. A few changes in the short term can cause drastically lower earnings expectations 5 or 10 years out.

I'm sure that my opponent already built a formidable defense around Yahoo!'s advertising business, as the media has lately been relentlessly discussing that chink in its armor. Maybe he explained that, although Yahoo! might be facing some difficult times, one needs to remember its powerful brand name and its audience of millions. Mike can cite as many metrics on eyeballs, page views, and stickiness he wants, but those number are nothing more than statistical curiosities unless he can show me the money.

Fortunately, Yahoo! recognizes that, to grow its earnings, it will need to leverage its brand name into other business lines. It can't depend exclusively on showing ads to freeloaders. As a result, Yahoo! has begun to emphasize diversifying its revenue stream. It's hard to make any predictions of how successful these new lines of business will be, as they are a drastic change from Yahoo!'s current business model.

It has only recently begun charging fees for its auction business, and the effect of those fees remains to be seen. There is talk of introducing other services, such as hosting websites for corporate clients, but Yahoo! will find a long list of competitors specializing in these niche markets. Perhaps it will try to sell premium content, but very few companies have used that model successfully. That's a pretty moot point for now, as Yahoo! must first come up with some proprietary material to sell.

The future of Yahoo! is uncertain, but the stock is priced like it's clear and bright. I don't doubt that Yahoo! will be able to grow its earnings, but not at the levels needed to justify its current price. There is a price at which I would consider buying it, but for now it's still too expensive for me.

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