Yahoo! Brands Itself a Winner

It's time for us to announce where we plan to invest our $500 for April. To be honest, we're actually doing this a little later than usual, but what's a couple of weeks to a long-term investor anyway. I found this month's decision to be a little more difficult than usual. There are a couple of reasons that I was left feeling this way. One is diversification. If you take a look at the composition of our portfolio, you'll see that we're quite heavily weighted towards technology companies. Personally, I don't view this as a bad thing, but I do take notice of it.

The other reason the choice was difficult is that, overall, our technology companies have seen their stock prices fall despite the fact that they have continued to perform at a high level; especially as evidenced by running the company's results through our Rule Maker Ranker spreadsheet. After a bit of internal debate (with myself no less; after all, if your weather this weekend was anything like what we had here in New Jersey, then sitting in front of a computer or spending time on the phone were about the last places a Fool wanted to be), I decided that I would recommend that we add to our investment in Yahoo! (Nasdaq: YHOO) again this month.

There are a few reasons that I came to this conclusion. One was its most recent quarterly results, which were covered quite well by two of my fellow portfolio managers: Matt in the April 6 Fool on the Hill and Zeke for Yahoo!'s Quarterly Update in Fool Research -- both linked at the bottom. These results also led to the company earning a score of 54 when I ran it through our spreadsheet.

However, there's more to it than that. You see, when I evaluate companies, I like to look at more than just the numbers. I like to get a feel for the company's future direction and whether or not I think its management has a clue (believe me, at some companies, even ones I've worked for, that's a real issue) and make sure that I believe the company really has expanding possibilities.

Recently, I've read a few different interviews (linked at bottom) with members of Yahoo!'s management team that have left me feeling quite positive about the company's future opportunities. These interviews have also made me comfortable that advertising revenue is certainly not the only way Yahoo! will make money both now and in the future. One of the keys to Yahoo!'s growth will be facilitating commerce through Yahoo! Shopping and all the related ancillary services.

First and foremost, Yahoo! realizes that the value of its brand is one of its most important assets. Yahoo! CEO Tim Koogle, in a recent interview with the Fool, spoke of how branding has mattered for Yahoo! from the very beginning. According to co-founder Jerry Yang, Yahoo! has "positioned itself as a network brand" -- one where once you get registered, you can use it to access e-mail and all kinds of other stuff in a very personalized way. You make it so that "It's your Yahoo! network... your platform to the Web." Part of the plan here is to get users to come to Yahoo! to shop because it can aggregate and organize all kinds of information including whatever you might want to buy.

It was also interesting to learn of the branding connection of three of our portfolio holdings. You see, when Gap Inc. (NYSE: GPS) decided to start emphasizing its own line of clothing, it sought some help from Coca-Cola (NYSE: KO) on how to go about building a brand. Now, Yahoo! has hired a Gap employee, Richard Rogowski, to be producer of Yahoo!'s shopping division. One of the important things that these three brands have in common is that they are accessible to everyone.

So, Yahoo's got a great brand that anybody with a computer has access to and has most likely heard of. How is it that Yahoo! can profit from this? Clearly, one thing it can do is provide greater reach in terms of customers to potential clients than many of these companies can garner on their own. Unlike America Online (NYSE: AOL), Yahoo! allows merchants to use the Yahoo! network as an extension of their own websites. By this I mean that a company can simply design its own website in any way that it wants while also taking advantage of Yahoo!'s large audience. If, instead, a merchant wants to sell its wares on AOL, then it is limited to the size of the store that it can fit into its box in the AOL mall. Explore Yahoo! Shopping and you'll see what I mean.

Another way Yahoo! can profit from its merchant relationships is charging a premium fee for more prominent advertising space, something that Yahoo! equates to anchor stores in a mall. Yahoo!'s real goal in the shopping space, however, is to serve as an enabler for retailers and customers. In other words, it wants to enable buyers to buy more and know more about what they're buying. And, according to Jerry Yang, "[Yahoo!] wants sellers to be able to do more -- storefronts, store publishing software [technology to put up stores online], our extension of other people's existing stores [on Yahoo Shopping]."

In some ways this could put Yahoo! in competition with Amazon (Nasdaq: AMZN). The difference is that Yahoo! is really only a middleman in the transactions that it facilitates, whereas Amazon is a true retailer.

Yahoo!'s level of involvement in the transactions that it facilitates can really be from beginning to end. An example of what Yahoo! could strive to achieve was given by Mr. Rogowski in a Wall Street Journal interview: "What is our goal? I know nothing about snowboarding. I go to a Yahoo! I get a snowboard. I find out all the information I need to know. I get the best deal, and I'm not ripped off, and it's a great experience and I use the online wallet, and it gets shipped to me, and I have a great customer experience." The goal is to make all this seamless. Plus, you don't have to worry about finding a salesperson to help you.

If you take this strategy and look at it in a broad sense, you can see why Jerry Yang said that Yahoo! will be "providing the media, commerce and community to engage more users and adding more services like online banking and Yahoo! Wallet, so people can shop, review, and manage their finances on the Web." On the other hand, if you want to sum it up in a few words, you could say that Yahoo! is looking to move beyond the traditional view that it's a place where people can find anything, as it's also striving to be a place where people can buy anything.

If you take this strategy and consider that it can be extended the world over (already in 23 international locales), then it's not so hard to believe that Yahoo! is only beginning to realize its potential. It's also a strategy that Yahoo! is aiming to provide over a number of communication mediums, as the company also aims to wireless enable all of its commerce services. As a Rule Maker investor, it's also comforting to know that while our company is only in the early innings in terms of its history, it's been able to achieve the success that it has while running a quality operation that has led it to achieve both profitability and superb cash flow.

Yahoo! has my vote for our next $500 monthly investment.

If you wish to discuss this report further, please feel free to ask your questions on any of the message boards linked below. I'll be back on Wednesday to discuss the latest quarterly results for Cisco Systems (Nasdaq: CSCO).

Phil Weiss (TMFGrape on the boards)

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