There are two things you need to know about Yahoo! (NASDAQ:YHOO) when it comes to picking apart its stellar fourth-quarter results from last night. The first is that it didn't truly earn its reported $0.25 a share over the past three months. The second is that the first point shouldn't take away from what really was another standout outing by the online juggernaut.
Yes, as in its September quarter, hefty realized gains after selling its stake in Google (NASDAQ:GOOG) accounted for nearly half of the quarter's profits. That's why if you hear folks making a valuation argument out there, claiming that Yahoo! is selling for less than 40 times annualized earnings if you multiply its final 2004 quarter by four, please do us all a favor and set them straight. Yahoo! can't print new shares of Google to sell off that quickly.
The Yahoo! you can rely on from here on out earned just $0.13 a share, but that was a dramatic improvement over last year's nickel showing. Revenues before its traffic acquisitions costs surged 54% higher, while free cash flow nearly tripled to $251 million.
The results capped a strong year in which earnings doubled to $0.36 a share with free cash flow clocking in at a healthy $844 million. Clearly online advertising has been very, very good to Yahoo! Not to belittle the company's sticky portfolio of properties, which include dating, premium email, and job placement services, but the company's subscription and listing revenues accounted for just 15% of the company's top line this past quarter. Web ads are behind the wheel here, and that's not the dangerous driver that may find you reaching over to fasten your seatbelt.
Last month I went over the many benefits of targeted online advertising over traditional marketing alternatives. While we may marvel at the evolution of television commercials now that companies such as Campbell Soup (NYSE:CPB) and Royal Caribbean (NYSE:RCL) can have their spots air in local markets when it's snowing out, that pales in comparison to more specific audience targeting benefits -- and accurate performance tracking -- online.
That's why Yahoo! is doing so well as sponsors realize that Web-enabled eyeballs matter again. Fellow dot-com traffic hubs such as Google, InfoSpace (NASDAQ:INSP), Microsoft's (NASDAQ:MSFT) MSN.com, and Ask Jeeves (NASDAQ:ASKJ) should all be benefiting from the online migration.
So it's OK if Yahoo! didn't really earn that quarter this time. There are more of those where that came from in the years to come in this prime Rule Breaker real estate.
What did you think of Yahoo! and its fourth-quarter report? Is the online ad market more or less susceptible than traditional marketing channels? All this and more -- in the Yahoo! discussion board. Only on Fool.com.Longtime Fool contributor Rick Munarriz does Yahoo! but that doesn't mean that he is buying it breakfast or adding it to his portfolio. He does not own shares in any company mentioned in this story and he is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its stage of defiance.
