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October 5, 1998

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Subject: Buy YHOO now? Bad idea!
Author: Allen11

Yahoo � YHOO �
Being in the Computer/networking/software business for over 30 years, I have read this discussion area with some amusement and consternation as the gambler in each of us is looking at where Yahoo will go next.

Bottom line: going long right now is not a good move.

If you insist on gambling by going short, you might consider options straddles where you can do it with a lot less equity by capitalizing on the outrageous premiums that YHOO options are commanding. For example, this morning October 120 Puts were 9.125 and Oct. 120 calls were 10.5. Buy the puts, and short the calls � say 10 contracts � and you are short 1000 shares at 120 � until October 16. In the meantime, you've collected over $1000. Want more time? Afraid of a temporary October blip with the upcoming earnings report? The same play is there for November options. When the stock drops (it will�keep reading), you're in the money.

  "When AT&T bid for AOL, they rejected Yahoo as too expensive � and that was at a split adjusted price of $40. Does that tell you something?"

Why will this speculative stock drop? Let's look at a few factors.

- Unlike Microsoft, or even (early days) NetScape, where the "user" had an investment in installed software and data, the Yahoo user base is free as the wind to move elsewhere. There is no "investment" on the user's part to come and go.
- Yahoo's "Intellectual Assets" are largely not its own � it is a collection of other's material. There is very little in the way of hard assets that justifies a 12+ billion valuation. Have you seen a "book value" figure?
- Common industry knowledge that Yahoo's registration database is a mess. Full of aliases and incomplete information, it is currently un-useable as a source of income from traditional marketing channels. Top industry pundit Jesse Berst recently wrote in an article titled "Can Yahoo Survive its Mega Screwup?" :

�"Yahoo is doing a poor job of collecting user names and demographics. Although its My Yahoo efforts represent an important first step, the company still lags behind in this all-important arena. It's doing an even worse job reaching out to those users with regular communications. In its arrogance and old-market mentality, Yahoo believes customers will always come to it. It scorns email reminders, push channels and other methods more forward-thinking companies use to reach out to customers�."

- Yahoo's the top portal brand, true, but Internet Advertising has a long way to go as a dependable revenue source. To quote a leading industry newsletter: "Portals may be hot, but market leader Yahoo! sells only 14% of its inventory at an average CPM of $4.36." � no solid financial play there!

- When AT&T bid for AOL, they rejected Yahoo as too expensive � and that was at a split adjusted price of $40. Does that tell you something?

- The Web drew millions of eyeballs this summer to eat up our $40 million Presidential smut story. That peak is over, the emotions on the "value of the Web" are cooling, just like they did after the Mars mission and top analysts are predicting a flight from speculative to quality securities. Example: CNET � Sept 24, 1998 "Internet stocks that have floundered during the past several weeks got a bump this morning, buoyed by double-digit gains yesterday, but analysts tempered hopes that the activity marks the beginning of another bull run. "This is a blip. Over the next couple of months, it'll be flight for quality," said Lise Buyer, an analyst with Credit Suisse First Boston. "Investors want to get their toes in the water, but the extreme momentum is of the past."

  "Folks, at this point, YHOO is strictly an emotionally driven stock being purchased for no other reason than a market "Hot Stock" mentality."

And lets not forget some market factors:
- The Dow is under extreme pressure because any company with international exposure is going to announce disappointing earnings this quarter. "Worst quarter in 8 years" is the word. RJR Nabisco, Viacom, Gillette, Boeing, Goodyear, IFF, Nortel, are but a few already issuing earnings warnings.
- Yahoo's institutional ownership went from 10 million shares at June 30, to just over 21 million at the end of August. The number of institutions in the game nearly doubled. Now you know what has been driving the stock up � large funds that decided to gamble to prop up dismal performance of their portfolios. These guys will be taking big time YHOO profits as the Dow turns south this month. Like the August pullback, Yahoo will sink like a stone. - What has fueled fund purchases? The steady influx of cash to the Mutual Funds. Last night's business news confirmed to us that for the first time in over 3 years, more cash was taken out of funds than put into funds.

Folks, at this point, YHOO is strictly an emotionally driven stock being purchased for no other reason than a market "Hot Stock" mentality. NetScape was in this position a while ago. Re-visit your historical NSCP charts. There is no fundamental business basis for anything close to YHOO's current valuation, and like it or not, the "new paradigm" of the Web does not alter the fundamentals of business balance sheets.

Keep your eyes open when you speculate. Yahoo is poised to drop right now as the Q3 earnings disappointments drag the Dow south, but that may mean a buying opportunity in a few weeks for the gamblers among us �. But anyone going long now just might earn them the right to use the "Fellow Fool" moniker in its original context. Look for the stock to test its $50-70 low in the near term.

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