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	Discussion Board Yahoo!

By Mike Trigg (TMF Tonto)

You could imagine my surprise to learn that Rimpy based his entire argument on valuation. Not quite! In fact, one need only travel to his profile page to understand his view on the current state of the market. The man believes so deeply that the "stock market needs a lobotomy" he's short Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and Nokia (NYSE: NOK), to name a few.

It's likely those positions have reaped rewards of late and I commend him for putting his money where his mouth is. A rumor has circulated around Fool HQ, however, that he invests in gold. If that vicious tale is true, I direct his attention to the wonderful book by Jeremy J. Siegel, Stocks for the Long Run. Siegel shows that one dollar invested and reinvested in gold in 1802 (inflation-adjusted) would have grown to $0.84 by the end of 1997. That same dollar invested in stocks would have become $558,945. Mike, do you really invest in gold?

With that off my chest, let's move on to the subject of this rebuttal: the valuation of the world's most recognized Web portal. Rimpy stated he doesn't like the company because its price is too high relative to its future earnings potential. He might truly believe that, but I was under the impression that the true value of a company was the net present value of the cash that the business can produce over its lifetime. That in part is why P/E ratios can tell us only so much about a stock.

Space constraints in the rebuttal don't allow for a comprehensive valuation argument. Of course, there are several ways to find out the value of Yahoo!, for example, applying a discounted cash flow analysis. While I'm confident that would yield a more favorable valuation of Yahoo! than what Rimpy has provided, let me instead point out a few items.

As indicated earlier, the online ad market is expected to grow to $28 billion by 2005. Yahoo! currently owns 12.5% of that market with its share growing by the day. Assuming Yahoo!'s market share remains unchanged, that would translate to $3.5 billion in advertising revenue by 2005. A market share of 15% would yield $4.2 billion in ad revenue, and 20% would provide $5.6 billion to its top line. Adding in the possibilities of the revenue Yahoo! can generate from e-commerce transactions it enables, and the revenue possibilities are endless.

We all know the kind of cash that Yahoo! can generate. Its business requires very little capital expenditures and its margins are excellent, which allows a great deal of its top line to trickle down. True, the company's cash position has weakened compared to the past (to see why read Phil Weiss' recent Rule Maker article), but it's still more impressive than most companies. In the end, the ad revenue possibilities, the amount of e-commerce that will be transacted via Yahoo!, the possibilities of new businesses, and the likelihood of a subscription model are just too overwhelming not to be bullish on Yahoo!'s growth potential.

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