Last Tuesday, before I even had the chance to read Yahoo!'s (Nasdaq: YHOO) Q3 earnings press release, I found that all the Rule Maker numbers and associated commentary were already posted on our Yahoo! discussion board. Thanks go to David Lloyd for his solid analysis of the quarter. In contrast to the news wires' minute-by-minute coverage of the perceptions about Yahoo!'s quarter, Fools like David were instead analyzing the facts.
For long-term owners of the company, there's little you need to know beyond the basic numbers of what was yet another outstanding quarter for Yahoo!:
- Revenue of $295.5 million, up 89.6% year-over-year
- Gross margins of 86.2%, up from 83.2% last year
- Net margins of 16.1%, up from 7.1% last year
- No debt and $1.6 billion in cash, up from $840 million in cash last year
- An estimated Foolish Flow Ratio of 0.26, down from 0.37 last year
- Cash King Margin of 51.0%, up from 37.9% last year
But my, did Wall Street think differently! Market participants took the shares out back and shot them down by over 30% in the subsequent days after last week's report.
Not to focus on the stock more than the business, but I sought an answer to that somewhat-unsubstantial-but-nonetheless-interesting question last Wednesday when Rule Maker manager Zeke Ashton and I had the opportunity to talk with Yahoo! Chief Operating Officer Jeff Mallett:
TMF: Seeing the market's reaction to what Zeke and I thought were some very solid numbers -- except for maybe the advertiser count growth -- are you surprised at all to see the shares tumbling so dramatically?The full interview will be included in the upcoming quarterly update to our Yahoo! Motley Fool Research coverage. Today's portion of the interview, however, is sufficient to bring us to a key Rule Maker investment lesson:
Mallet: Well, I agree with you guys -- I like the numbers, too. I thought they were pretty darn good. I'm a little bit surprised at the market's reaction. For a small subset of folks up there [on Wall Street], it didn't really matter what we said on the conference call. We've been experiencing [difficult] market dynamics, which will continue for a little while. A subset of the market was probably expecting us to deliver a miracle with this quarter's results.
In last quarter's conference call, we told the investment community that there are some bumps out there which will take several quarters to get through -- but we'll be a better company for it. Now, this quarter, a lot of people were hoping for us to say, "Ta da! We said it'd take three or four quarters, but in only one quarter, we fixed everything up." We've said clearly that's not the case. The industry still faces some challenges for the next couple of quarters.
TMF: So, in other words, everybody wanted to hear that the damage is done. They didn't hear that, so the stock is selling off.
Mallet: Yep, if we'd turned in the same numbers and said, "Whew, things are groovin' again; the damage is done," then I think there probably would've been a different reaction [from the market]. But, I think that would've been shortsighted on our part.
Even Rule Maker-caliber business performance cannot entirely prevent a stock from taking a sharp fall due to the trading mentality of short-term momentum players.Because Yahoo! is facing a tougher Web advertising climate over the next nine months, the trader mentality is, "Adios, see ya in nine months when business is firing on all cylinders again." As a result, Yahoo! is now trading at the same level as when we originally purchased shares in February 1999.
Back then, in the early days of this portfolio, we often stated that we'd be willing to watch our stocks go sideways for a few years, if necessary, in order to go ahead and take an ownership position in the companies we believe will dominate for the next decade (and hopefully longer). In case you thought we were joking, we're now getting the chance to make true on those intentions in the case of Yahoo!
But, if anything, we're enjoying the opportunity to accumulate shares at these lower prices. (We added 17 shares to our account this past Thursday.) The fact that we add $500 of fresh savings to our account each month makes us net buyers of stock for years to come. And as such, today's declining share prices of great companies actually stands to improve our long-term returns.
-Matt Richey, TMF Verve on the Discussion Boards