The Market Hollers at Yahoo!

Shares of leading Internet portal company Yahoo! are down this morning as the company last night reported disappointing fourth-quarter results and a downbeat outlook for the new year. Fools are busy sizing up the company's long-term future, positioning, and market opportunties both here and on our discussion boards.

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By Motley Fool Staff
January 11, 2001

It didn't take long for the market to react strongly to last night's news that leading Internet portal operator Yahoo! (Nasdaq: YHOO) recorded fourth-quarter revenue numbers that missed estimates, turned in more investment income than expected, reported pressure on operating margins, and lowered 2001 guidance.

In this article, Fools pass the flashlight to share their thoughts. Take a look, then post your own on our Yahoo! discussion board.

Rick Aristotle Munarriz (TMF Edible), Writer/Analyst
Even before the megasite's watered-down outlook, Yahoo! had already shed more than $100 billion in market capitalization. Euphoria has gone full circle. The company that was trading for hundreds and hundreds times revenues is now fetching about 50 times earnings. The ad market is in a slump, and that is obviously being felt acutely in the online realm where clickthroughs and banner ad rates are in freefall. Unlike that billboard sitting idle at the corner, however, or that network show scrapping to maintain its ratings, Internet usage continues to grow. Yahoo!'s page views will continue to grow.  

At lower rates? Sure. But that does not belittle the bigger picture for the online destination of choice. As we saw over the holidays, tenants big and small are more than happy to value Yahoo! as a landlord controlling access to popular shopping sites. Unlike many who have failed overseas, Yahoo! has proven a golden export as well. The days of Yahoo! at $250 are gone. Over. But the company is still in a comfortable position with sector-enviable profitability and market-enviable margins. Volatility might now give way to steady, calculated, healthy returns. Perfect. Yahoo! has grown up, and it's got the scars to show for it.    

Bill Barker (TMF Max), Senior Producer, Investing
I find it very hard to find a silver lining in what appears to be an awfully negative outlook from Yahoo! about the state of its business. The business is still largely dependent on advertising, and too dependent on advertising from businesses that are running out of money. While it's interesting to speculate about Yahoo! developing some sort of premium areas of the site for which it could charge subscription rates, the burden would be on Yahoo! to prove that it can be the first Internet site to successfully pull off that strategy.

The company is still remarkably expensive at this price considering that it is apparently now in a state of growth that could be categorized either as "negative" or "incremental," depending on how optimistic you are. I consider myself optimistic -- so let's call its growth at the moment real, but terribly uninspiring.

LouAnn Lofton (TMF Lou2), Writer/Analyst
So Yahoo! merely met expectations. So they lowered guidance for the coming fiscal year. Is there more behind this story than what all of today's headlines would lead you to believe? Of course there is. There were several positive trends in Yahoo!'s Q4 earnings announcement that we should remember, even as shares are smacked today.

The number of advertisers and merchants using Yahoo!'s services rose in the fourth quarter. That number declined in Yahoo!'s third quarter, so this is positive. Yahoo!'s number of users and page views increased, again. Perhaps most importantly, though, the company is succeeding at diversifying its revenue stream. Yahoo! recently announced that it will start charging nominal fees for its auction listings. Yahoo!'s introducing new services, such as consulting and brand evaluation. The company saw its holiday shopping traffic double.

Most telling, though, is that the percentage of revenues it gets from pure Internet companies declined. Today 67% of Yahoo's revenues come from companies that are not just on the Internet. That's up from 60% in the third quarter, and Yahoo is working to increase that number even more.

This isn't to say that the next year won't be challenging for Yahoo! The company is reacting to market trends, though, with great flexibility. (This Fool owns shares of Yahoo!)

stockchamp, Community Member, in a Community Perspective article published yesterday
The next question that naturally arises is, "What other services can Yahoo! charge for?" An article on the CNET website recently addressed this issue. One of the main things Yahoo! could potentially charge for is subscription for its content. However, charging for content has been unsuccessful for the most part. The only company that has been able to do it so far is America Online (NYSE: AOL). That is the great thing about AOL's business; it can charge subscriptions for providing Internet access and content, as well as advertising and commerce. That's a gold mine. Unfortunately for Yahoo!, most Internet users do not want to pay for content... we want it for free! Even harder for Yahoo! is the fact that it doesn't create its own content; it brings content in from other places on the Web. If it starts charging for that, Internet users might just go to the places from which Yahoo! aggregates its content.

Paul Larson (TMF Parlay), Research Analyst
I have never owned Yahoo!, but I am mighty tempted by the situation the market is throwing at our feet. To be certain, the short-term situation related to online advertising is brutal, but I'm a Fool -- and I like Yahoo's long-term positioning and financial model.

Here's a company that has one of the premiere brands on the Internet, is quite profitable, has $1.7 billion in cash, zero debt, generated $400 million in free cash flow last year, is still growing -- maybe not as much as once expected, but growing nonetheless -- has a return on equity approaching 20%, and was able to produce over a billion dollars in revenue last year on a fixed asset base of only about a hundred million. The lowered expectations for Yahoo! are thanks to external factors related to the economy, not due to anything wrong with the company. When I get a chance, I'll be buying.

Tom Jacobs (TMF Tom9), Writer/Analyst
I own some Yahoo!, so I'm hardly disinterested, but for me the key questions are: Do you think there will be more or less advertising on the Internet in 5 years, 10 years, or longer? Who do you think has the dominant brand? Which so-called portal has more and more users who spend increasing time at the site? Yes, Yahoo!, and Yahoo!

Short term, the rate of increase in broadband Internet penetration hasn't kept up with expectations, and it's a major bottleneck for Internet usage (how can you take advantage of the Internet's fat-pipe promise with 56kpbs dial-up?) and revenues. It will end. Yahoo's concerns are short-lived, and the price decline is an opportunity. Valuation is important, and as Yahoo!'s price has plummeted, it has come closer to the reality of its long-term business prospects.   

Nico Detourn (TMF Nico), Writer/Message Board Stroller
It would have been unrealistic to expect Yahoo! to make it out of 2000 untouched by the online ad slowdown. The question was by how much, and we learned that yesterday. The follow-up question is: How much does it matter over the long run?

Just as Yahoo! can't bypass the ad crunch, or whatever else the economy throws in its way, neither can its competitors. Like weather on a playing field, those are the conditions of the game. While a deteriorating field condition will affect the immediate performance of the players, the field itself is always level, and at any given level, the players remain, essentially, unchanged. So do their relative strengths. And it's our assessment of their relative strengths that leads us to choose one player over another.

So the question is really this: Are the things that made Yahoo! Yahoo! one year ago, still the things that make Yahoo! Yahoo! today? If that can be answered with a reasonably confident "yes," then all we're really talking about is the weather. Ever notice how the guy broadcasting from the new Nasdaq market site looks and sounds and gestures just like a weatherman? (This Fool owns shares of Yahoo!)

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