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Yahoo shares run in place as analysts ponder future

Keeping with tradition, shares of Yahoo! Inc. (Nasdaq: YHOO) hardly soared Thursday after the Internet bellwether reported stronger-than-expected earnings, revenue and traffic. Analysts upped revenue targets for the portal, but noted a few long-term concerns.

At 10 a.m. EDT, Yahoo shares were up 2 percent to 170 11/16.

After the closing bell Wednesday, Yahoo reported second quarter operating earnings of 11 cents a share on sales of $115 million. First Call consensus was 8 cents a share and many analysts were expecting sales of about $103 million.

Fueled by gains abroad, Yahoo also reported 310 million average page views in June and 65 million registered users. Both figures were well above expectations.

Apparently, those results weren't enough to satisfy Wall Street. Recently, investors have found a reason to worry.

PaineWebber charted the movement of Yahoo shares following earnings reports. Despite positive earnings surprises, Yahoo shares fell after each of the last three earnings releases, off 17.5 percent after its third quarter 1998 results, 36.2 percent after the fourth quarter, and 21.5 percent after the first quarter. PaineWebber's data tracked Yahoo shares from the 4 to 14 days following a pre-earnings run-up.

This quarter, some investors may have been disappointed by the lack of a stock split. According to Henry Blodget, an analyst at Merrill Lynch, Yahoo may also be falling prey to the laws of large numbers.

"One of the key drivers of the stock's multiple expansion over the last three years has likely been the company's eye-popping revenue growth rate-and this growth rate has started to slow significantly," wrote Blodget in a report. "After settling into a 200 percent-plus year-over-year growth for eight quarters, and actually accelerating slightly though 1998, Yahoo!'s growth has ticked down to 186 percent in Q1 and 157 percent in Q2."

Blodget, who admitted to being nit-picky in his report, may have doused any Yahoo euphoria. "By noting this trend, we don't mean to criticize it-off of a base as large as Yahoo!'s, this growth is still amazing," he said. "If the growth rate continues to slow, however, we just consider it less likely that the stock's revenue and earnings multiples will continue expanding through the year 2000."

Here's a roundup of analyst comments:

  • Blodget:"Yahoo! remains a core holding in our Internet portfolio. We give the quarter an "A." As the growth of new internet users in the U.S. continues to slow, international operations are becoming more and more important for maintaining strong traffic (and, ultimately, revenue) growth. Blodget added that Yahoo is well positioned abroad.

    Blodget raised his 1999 revenue estimate from $435 million to $525 million, including $55 million in revenue from Broadcast.com. The 2000 estimate jumped from $610 million to $750 million with $85 million attributed to Broadcast.com. "As previously described, the Broadcast.com acquisition will be slightly dilutive for the first 12 months and accretive thereafter. As a result, we are cutting our 1999 EPS estimate from $0.39 to $0.35 and raising our 2000 estimate from $0.54 to $0.56," he said.

  • Lise Buyer, analyst with Credit Suisse First Boston: Buyer boosted her earnings estimates for 1999 earnings to 41 cents a share from 38 cents a share. For 2000, she bumped up earnings estimates to 67 cents a share from 58 cents a share.

    Buyer's revenue targets jumped from $430 million to $540 million for 1999 and from $640 million to $780 million for 2000.

    "These folks are clearly laser focused on the details of the business and it shows. Heads down, continually delivering better than expected numbers on the top line concurrent with expenses below forecasts," Buyer told ZDII. "With the understanding that this company is in the midst for two major merger integrations - tricky under any circumstances but particularly challenging in such a rapid growth environment, I am very very optimistic about the long term outlook for this entity."

  • James Preissler, analyst with PaineWebber: "One area where we did not see a large outperformance was in its average daily page views, and we believe this trend may bear watching going forward," he said. "Yahoo! reported average daily page views of 310 million in June (incl. Geocities), up from 275 million in March, or an increase of 12.7 percent." Preissler also noted that Geocities traffic was flat at 40 million. "This roughly means that Yahoo organically (netting out Geocities and Yahoo Japan) grew its average daily page views at only a 13-14 percent quarter to quarter rate, well below the rate it grew several of its other key operating metrics."

    "Yahoo could run into trouble producing enough valuable page inventory to meet the demands of its existing advertising contracts, let alone chase down additional, new revenue opportunities," said Preissler. "We additionally continue to wonder whether categories such as email, chat, stock quotes, and homesteading will generate enough high-value traffic and ad inventory to satisfy advertisers."

    Preissler revised his 1999 earnings expectations to 35 cents a share for 1999 and 53 cents a share in 2000. In 2000, Preissler is expecting revenue of $752 million, up 42 percent from his 1999 estimate. Those revenue targets should push Yahoo in the right direction.