World's Scariest Stock: Yahoo!

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Yahoo! (Nasdaq: YHOO  ) ? More like Ya - boo!, if you ask me. Our 120,000-strong Motley Fool CAPS community appears to agree:

Metric

Yahoo!

CAPS stars (out of 5)

**

Total ratings

4,509

Bullish ratings

3,594

Percent bulls

79.7%

Bearish ratings

915

Percent bears

20.3%

Bullish pitches

678

Bearish pitches

185

Data current as of Oct. 29, 2008.

One, two ... Jerry's coming for you
They're like the scared teen who's downed a pot of coffee in order to keep child killer Freddy Krueger at bay. Chief Yahoo! Jerry Yang lacks Krueger's scars or bladed glove, but his reign has murdered shareholders like few others. (Former Halloweenie Donald Trump comes to mind.)

The stock is down more than 55% since last June, when a decapitated Yahoo! turned to Yang to stop the bleeding. No such luck. A red river of losses still runs in the streets outside of the company's Sunnyvale headquarters.

That $33 per share Microsoft (Nasdaq: MSFT  ) offered you in May is looking pretty good about now, eh, Jerry? Slasher.

Three, four ... here comes the gore
It's so bad that Yahoo! last week said it would cut at least 10% of its workforce. Trouble is, we've heard this story before, and each time, the company ends up with more staff.

Heads up, former Dell (Nasdaq: DELL  ) employees: Yahoo! is apparently hiring.

Google (Nasdaq: GOOG  ) , meanwhile, is hacking away at its search rivals like Jason Voorhees on, well, pretty much any day of the year. The numbers are startling:

Company

August 2008

July 2008

Change

Google

63%

61.9%

1.1

Yahoo!

19.6%

20.5%

(0.9)

Microsoft

8.3%

8.9%

(0.6)

Ask Network

4.8%

4.5%

0.3

AOL

4.3%

4.2%

0.1

Source: comScore.

Ugh. Only DoubleGoo, IAC's (Nasdaq: IACI  ) Ask Network, and Time Warner's (NYSE: TWX  ) AOL saw growth, and only Google enjoyed meaningful growth. Yahoo! lost more share than any of its peers.

But Yahoo! is more than a search laggard. BusinessWeek each year ranks the most innovative firms around the world, and each year, Google ranks near the top. Yahoo! was ranked at one time ... no longer the case:

Year

Yahoo! Rank

Google Rank

2008

Unranked

2

2007

61

2

2006

61

2

Sources: BusinessWeek, Boston Consulting Group.

Yahoo! can't keep up. Think of how startling a statement that is. The company has spent more than $1.4 billion to acquire nine firms since January of 2007, including $160 million for video syndicator Maven Networks in February.

Run!
But that's only part of the story. Yahoo! is comparatively poor at buying and shepherding innovation. Not good.

After a decade of studying Silicon Valley's finest, I've concluded that tech firms are best measured by their ability to efficiently use research and development dollars. Apple (Nasdaq: AAPL  ) is outstanding at this, as you might imagine. Yahoo! ... not so much.

Let's dig into the numbers. Calculating R&D efficiency is simple. Just divide the amount of incremental research investment required to produce new revenue and then express the total in dollars and cents. Here's how Yahoo! measures up:

Yahoo!

Last 12 Months

2007

2006

2005

New revenue

$394.4 mil.

$543.6 mil.

$1,168 mil.

$1,683.2 mil.

Additional R&D expense

$232.5 mil.

$251.1 mil.

$263.6 mil.

$188.7 mil.

R&D efficiency

$0.59

$0.46

$0.23

$0.11

Source: Capital IQ, a division of Standard & Poor's.

So, over the last 12 months, each new dollar of Yahoo! revenue required $0.59 in R&D expense to produce. But look at the pattern. Yahoo!'s cost of innovation is up more than five-fold since 2005. Yikes!

This isn't a perfect figure, of course. R&D begun in 2008 may not yield results till 2012 or later. And new revenue can be as much or more due to aggressive sales staff, a bustling channel, or any number of other factors besides outstanding product design. Such are the limits of financial shorthand.

Still, I believe this measure can be instructive if we ignore the pursuit of precision and focus instead on patterns. With that in mind, compare Yahoo! with Google:

Google

Last 12 Months

2007

2006

2005

New revenue

$5,948.5 mil.

$5,989.1 mil.

$4,466.3 mil.

$2,949.4 mil.

Additional R&D expense

$809.8 mil.

$886.6 mil.

$629.1 mil.

$215.7 mil.

R&D efficiency

$0.14

$0.15

$0.14

$0.07

Source: Capital IQ, a division of Standard & Poor's.

Need I say more? Jerry's coming for your portfolio, Fool. I think you should run. Do you agree? Go here in CAPS and rate Yahoo! to underperform. (It's 100% free to participate.) And then be sure to return here next week to find out which stock Fools voted the world's scariest.

Get your clicks with related Foolishness:

Fool contributor Tim Beyers recently returned from a tour of Silicon Valley with his Rule Breakers teammates, during which they visited more than a dozen established and emerging innovators. Care to learn more? Sign up for a 30-day trial. It's 100% free.

Tim had stock and options positions in Apple and Google at the time of publication. Google is a Rule Breakers recommendation. Apple is a Stock Advisor selection. Dell and Microsoft are Inside Value picks. The Motley Fool's disclosure policy wishes your portfolio a safe and spooky Halloween.


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