Worst Stock for 2008: Yahoo!

Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

It's Google's (Nasdaq: GOOG  ) world. We just live in it.

We don't just search for information -- we "google it." We don't watch videos on just any website -- we look to YouTube.

And as the online world delves even further into the potential of Web 2.0 this year, Google -- joined by a few other leading innovators -- will pave the way. What's more, this could be the year that Google overtakes Yahoo! (Nasdaq: YHOO  ) as the world's most popular Web destination.

Yahoo! has already enjoyed the best of its run. For the reasons above, and those I'll detail below, I believe Yahoo! will be the worst stock for 2008.

Miss Unpopularity
Let's start with the searches. Yahoo! can't keep up with Google. According to Hitwise, Google slightly increased its market share to 66% of U.S. search traffic in December. Meanwhile, Yahoo! dipped slightly to 21%. That trend is nothing new; Google's share of the search market has steadily inched ahead, while Yahoo!'s continues to crumble.

Yahoo! has tried to compensate by diversifying its online offerings. Some of these ventures, especially Yahoo! Mail and Yahoo! Finance, are extremely successful, boasting loyal followings. But Yahoo! Mail faces stiff competition from Gmail and Microsoft's (Nasdaq: MSFT  ) Hotmail. Its financial site will be challenged by News Corp.'s (NYSE: NWS  ) recent decision to free WSJ.com. Yahoo! Personals is one of the largest online dating sites, but I'm betting that user-driven platforms on Facebook, MySpace, and even Craigslist will gain market share in the matchmaking world over the next few years.

Despite a handful of successful destinations, the overwhelming majority of Yahoo!'s ventures don't stand a chance. Take a stroll through the sidebar on Yahoo!'s homepage; for each destination, you'll probably be able to think of a better alternative elsewhere. I suspect that this track record will only continue.

According to comScore, traffic spent surfing through Yahoo!'s site dropped 13% this past November, year over year. Microsoft's MSN properties also saw a dip of 5%, but Google proved resilient, increasing 116%.

Even as Google keeps users on its site longer, it's also cashing in on those eyeballs. As fellow Fool Rick Munarriz points out, Google almost tripled Yahoo!'s online revenue this past quarter. Even though Yahoo! is the world's most popular destination, it just can't seem to monetize its users.

Yes, Yahoo! has notable advertising partners, including eBay (Nasdaq: EBAY  ) and Viacom (NYSE: VIA-B  ) , the parent company of MTV, Nickelodeon, and Comedy Central. But online advertising is an extremely competitive business. One little slip-up, one lag in innovation, and well-funded competitors such as Google, Microsoft, or Time Warner's (NYSE: TWX  ) AOL will quickly pounce on Yahoo!, snapping up its accounts and annihilating Yahoo!'s share of the ad market.

With its traffic numbers declining, it will be increasingly difficult for Yahoo! to expand its network of advertising partners. It's tough to argue that ads will perform better on a Yahoo! platform than on one of its major competitors'. Even the ad spaces on social-networking sites Facebook and MySpace have already been claimed, by Microsoft and Google, respectively.

Overrated and overvalued
Some observers are quick to peg Google's shares, trading at almost 50 times trailing earnings, as overvalued. But during the past four quarters, Google has grown its earnings by 62%. Meanwhile Yahoo! trades at 45 times trailing earnings, with a 35% drop in those earnings over the same time period. And if you look at their forward P/E ratios, Google's P/E of 31 is actually less than Yahoo!'s P/E of 44.

Some might fall prey to Yahoo!'s attractive five-year compounded annual revenue growth rate of 52. Just remember that it's been boosted by the favorable tailwinds that followed the dot-com bust. It shouldn't be given much weight, in my opinion.

The only potential risk to my bearishness here is the rumor that Microsoft might make a bid to purchase Yahoo!. That tale surfaced last year, and it's begun to simmer once more. While such a deal is possible, a partnership between the two seems more likely than a complete buyout. Partnering with Mr. Softy might shore up Yahoo!'s failing story for the foreseeable future, making any potential deal something to watch. All the same, I'm not sure Microsoft would make such an arrangement, and the antitrust legislation sure to follow would put a damper on Yahoo!'s stock performance.

Whether or not you agree that Yahoo! will be the worst stock for 2008, head over to CAPS and let us know whether you think Yahoo! will underperform or outperform the market going forward. We'll tally the votes and reveal the "winning" worst stock later this week.


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