Email this page Format for printing Reuse/Reprint
	Dueling Fools Introduction Bull Argument Bear Argument Bull Rebuttal Bear Rebuttal Vote Results Flashback: Procter & Gamble
	Discussion Board Yahoo!

By Mike Renshaw

Mike and I agree about few of things. We both think that Mike is a really cool name. We both think that our mutual hometown of Kansas City is a city that you can be proud of. And we both think that Yahoo! is a strong business with a good future. However, I don't think that Yahoo! is a good investment right now. I like Yahoo!'s business and its future, but I just don't like its price. At under $10 per share, I might be bullish on the stock. But at these prices, I'm going to remain bearish.

Buying high-P/E stocks with good growth opportunities is fine, but at Yahoo!'s current price, it needs stupendous growth opportunities. Mike cited all the usual more-people-logging-on-everyday statistics. I don't mean to belittle the incredible growth in Internet usage, but it's clear that the gangbuster growth of the past few years is slowing down. Heck, Internet usage even declined in December as compared to the preceding months. The growth rates of the initial boom period cannot be extrapolated into the future. Never mind the capital markets, both Internet usage and PC sales are flattening.

Yahoo! will have a very difficult time tripling or quadrupling its earnings just to catch up to its current price. And did I even mention how the current earnings base is juiced up with investment gains, unexpensed labor compensation, and income tax breaks from employees exercising options? So many bear arguments. So little column space.

In the past, Yahoo! could make slight modifications to its site and enter new foreign markets. But by now, they're already in all the easy countries such as France, Germany, or Japan. In a similar sense, Yahoo! could make slight modifications to its critical mass advertising model and create new services. But by now they're already in all the easy markets such as quotes, chat, news, message boards, and auctions.

As the task ahead appears more difficult, the proposals for completing it become bolder. Can Yahoo! sell premium content? Maybe if it can first come up with some proprietary material. Can it charge subscription fees for Yahoo! Finance? Probably not as long as comparable services are available for free. More transaction fees from e-commerce sales? I've always found middlemen to be an obstacle to increased efficiency, but if that's the way you think the 'Net is going to evolve, then Yahoo! is well-positioned to be a middleman. Can it set up a B2B exchange? Sure, why not, everybody else already has one.

Yahoo! is facing a very challenging time. It will have some successes and some failures. In my opinion, too many successes and not enough failures have been factored into its stock. Until it gets in line with more reasonable future expectations, I'm going to remain bearish on its investment potential.

Vote Results »