The following article is part of The Motley Fool's "Stock Madness 2005 ," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Yahoo!
Sunnyvale, Calif.
$31.58
52-week low-high: $20.81-$39.79
$44.1 billion market cap
By Rick Aristotle Munarriz (TMF Edible)
Do you Yahoo!? You're not alone if you do. The company claims to be the most trafficked online destination, and with its original search engine, its popular email service, and its leading HotJobs.com employment and dating classifieds sites, Yahoo! knows how to lay out the adhesive flypaper that buzzing cybersurfers are helplessly stuck to.
Last year the company generated $844 million in free cash flow and saw revenues soar by 120% to hit $3.6 billion. Profits doubled to $0.36 a share. What's not to like? Double-digit net margins. More than a billion bucks in operating income before appreciation and depreciation last year, and Yahoo! expects to close in on $1.5 billion this year.
While it may seem alarming that all but 16% of the company's revenues come from online advertising, it's the sponsors that foot the tab for Yahoo!'s free and sticky offerings. That's not really such a bad place to be when you think about it. Google
Offline advertisers are making the online migration where campaigns are fully accountable and can be perfectly targeted. Yahoo!'s acquisition of Overture landed it the pioneer in paid search, and with sponsors paying as little as a dime for a qualified lead, it's easy to see why ad budgets keep devoting more and more cash to buy Yahoo!'s billable Web space.
The company has also spent the past few years exporting its popularity. These days Yahoo! reaches more than 345 million unique users in 25 countries through 13 different languages. So the question shouldn't be: "Do you Yahoo!?" It should be: "Do you know anyone who doesn't?"
Fool contributor Rick Munarriz does indeed Yahoo!, though he can't belt it out in a cool little yodel. He does not own shares in any of the companies mentioned in this tournament match.
NetEase, Inc.
Beijing
, China
$45.25
52-week low-high: $28.15-$57.17
$1.4 billion market cap
By Dave Mock
The Yao Ming of stocks has brought his game to Yahoo! in this first round matchup: Motley Fool Rule Breakers newsletter pick NetEase.com, an Internet and mobile entertainment company operating in China, is represented in the U.S. market under American Depositary Share (ADS).
What makes NetEase.com compelling to investors is the potential of its market and the breadth of its product offerings. Once identified in wireless circles as a lead portal offering high-margin mobile media and messaging products, NetEase has leveraged this success to push into other lucrative and related areas: online gaming and advertising.
A leading provider of massive, multiplayer online games, NetEase banked $23.8 million in revenue from this division in the latest quarter, a large chunk of its total quarterly revenue of $31.6 million. The online gaming division is on fire, clocking in with more than 22% sequential growth, and is second only to Shanda
Now, like American stalwart Yahoo!, NetEase is pulling significant high-margin revenue from online advertising through its various portals. Eyeballs translate to dollars in the online world, and NetEase is milking this cow to make lots o' butter. As more and more gamers subscribe to its services, the advertising business will grow as well.
NetEase is highly profitable, bringing in $15.7 million in the latest quarter, giving it profit margins that consistently land in the 50% range. The high-margin products help the company maintain a respectable P/E of 28, and a forward P/E of 15 even while its sales are relatively low, making it an attractive prospect for investors.
With a market capitalization a full 30 times less than Yahoo!, NetEase certainly has more room to grow up in the online world. And in this Fool's opinion, having a leading presence in the most populous nation in the world gives NetEase the odds in this off-court matchup.
Fool contributor Dave Mock knows how to make butter -- churn, baby, churn. He owns no shares of companies mentioned here.
Rebuttals
As a member of the Rule Breakers team, it's hard to knock NetEase. Great company. Promising region. However, Yahoo! is already set to cash in on China's potential. From its Yasou search portal to the auction site it launched with Sina
No matter your penchant for size, in the world of investing, size does not matter. Whether Yahoo! does 10 times the revenue of NetEase or 100,000 times that number, what matters is the price investors pay for the opportunity the company has. In the case of NetEase, it is at a much earlier phase of growth than Yahoo! is, and it's priced more reasonably. So the question should be: "Who has the room to grow 10 times bigger?" I say NetEase. -- D.M.
Who won? Click here to cast your vote.
The Motley Fool is investors writing for investors.
