When the dynamic duo of Fischer and Graney look at possible investments for the next 18-20 years, they consider the following criteria, among other things:
- Sustainable market-beating earnings and sales growth
- Industry-leading management
- Double-digit net profit margins
- Consistently improving business performance
- Reliable dividend payment growth
- Value-adding share repurchase program
- Strong balance sheet
- Industry leadership and long-term viability for more of the same
Here is how I see Yahoo! in each of these areas in an abbreviated fashion:
- Earnings and sales growth rates have been solid, with both at triple-digit rates in the most recent period. However, the emphasis up to this point has been on operational growth over financial growth, which concerns many value-focused investors. Yahoo! is fiercely dedicated to adding users, access points, features, content, and partners at this time, placing secondary priority on developing revenue streams. In the drive to become your personal Internet network -- your one-stop, customized access to virtually everything -- Yahoo!'s commitment to developing, then cementing its brand has overshadowed all else. The brand image based mostly on fun and medley of use is locked in on commanding consumer time and loyalty. It's Yahoo!'s firm belief that dollars will follow eyeballs.
Moving away from traditional Internet parameters (if the Internet has tradition at this point), Yahoo! is geared at expanding its accessibility to voice interactivity (voice chat, voice e-mail, voice messaging, etc.), expanding wireless connectivity, and further developing business and broadcast services. The revenue growth rate of business services in the past year was 150% greater than the growth of advertising and sponsorship revenue, showing promise of a healthy future revenue pool. Yahoo! continues to find creative new ways to expand and addict its user base and is now beginning to monetize its high-margin business. There's nothing to indicate to me that sales and earnings growth will not be sustainable going forward.
- The strength of Yahoo!'s management team has been its devotion and ability to establish its brand and its goal to become the most popular, essential, and valuable source for content distribution and interactivity anywhere. The braintrust has propelled Yahoo! to become the leading guide in terms of traffic, advertising, household and business user reach. I think it's pretty clear Yahoo! has industry-leading management.
- Net profit margins have risen above 18%. Impressive.
- Yahoo! is growing earnings, profits, and cash at a very healthy clip. Business opportunities are expanding and the company is finding better ways to profit from that expansion.
- Yahoo! does not pay a dividend and likely will not in the near future. This is one area that Yahoo! certainly falls short based on our criteria.
- Yahoo! is not repurchasing shares at this time.
- The balance sheet is impeccable. Zero debt, loads of cash.
- I think it's no stretch to say that Yahoo! is clearly the leading Internet portal and search engine. It may also be the most dominant Internet brand name. To me, the key to long-term leadership viability lies in the close relationship it has with its dedicated users worldwide. Yahoo! has become a choice, a habit, and a community for nearly 150 million users.
Yahoo! ranks pretty favorably to me as potential Drip candidate. How does it rate on your scorecard? Let us know on the Drip Companies message board. I greatly enjoyed the comments from both sides of the fence after last week's column. Keep em' rollin'.
Drip on, Fools!
