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Analysts: Yahoo shares still too pricey

Shares of Yahoo fell 18 percent Thursday, but analysts said the Internet portal's stock is still too pricey considering that the company's 2001 earnings will be substantially lower and its CEO Tim Koogle is stepping aside.

After market close Wednesday and a long trading halt, the leading Web portal said revenue for the first quarter will be revised to $170 million to $180 million. The company also said its pro forma net income will break even. That's well below the $232 million in revenue and per-share profit of 5 cents that Wall Street analysts expected, according to First Call.

To make matters worse, Koogle admitted the company can't predict earnings for the year. Chief Financial Officer Susan Decker said the company is committed to breaking even. According to First Call, Yahoo was expected to post earnings of 36 cents a share for 2001. Yahoo shares fell $3.84 to $17.09 in early trading.

"Yahoo stock has declined about 40 percent since early January. Despite this, we still see downside to the low teens," said ABN AMRO analyst Arthur Newman, who rates Yahoo with a "reduce" rating. Newman said Yahoo was trading at 30 times its previously projected 2001 earnings. Now that those earnings will be substantially lower, so will the stock price.

Lehman Brothers analyst Holly Becker, who has sounded warning bells about Yahoo for months, said Yahoo "still has a hefty valuation, a business model in transition, and very little earnings visibility."

Newman said Yahoo's gloomy news cast a pall over all online media companies that depend on advertising. Indeed, shares of Terra Lycos (Nasdaq: TRLY) fell 63 cents to $11.88; and CNET Networks (Nasdaq: CNET), the publisher of this Web site, lost 59 cents to $9.97 and issued a profit warning on Thursday. Online advertising company DoubleClick (Nasdaq: DCLK) lost $1.06 to $12.25. AOL Time Warner (NYSE: AOL), considered to be the best of the bunch, was up 5 cents to $45.35.

"Sometimes if you build it, they will come, but they might leave their wallet at home," Newman said. "This seems to be the case with Yahoo. The company continues to increase usage minutes with little effect on net ad impressions. Specifically, Yahoo increased usage to nearly 116 million hours in January up over 100 percent from January 2000, while decreasing net ad impressions by about percent," he said.

And it'll only get worse. Newman said dot-coms still account for a big chunk of Yahoo's top-10 advertisers.

Koogle's exit just the beginning?
The news that Koogle is stepping down had Wall Street wondering what's really going on behind the scenes at Yahoo.

Yahoo has lost four key international executives, including the heads of Canadian and European operations, head of Asian properties, and the chief executive of Yahoo Korea. "We believe these departures could be the tip of the iceberg as times continue to be tight through at least the first half of 2001," said Newman.

Becker said Yahoo's decision to look outside the company for a new CEO is a positive move in the long run. The company has to act more like a traditional media company, she said. "It needs to broaden its traditional advertiser base and relationships with both clients and agencies," she said. "We believe that Yahoo's Internet culture has held it back from realizing its full potential."

However, Becker said Koogle's decision to step down also raises questions. "A change as drastic as this suggests that there is more here than meets the eye," she said. "We question how bad things really are inside Yahoo and how long it will take to fix them."

Analysts said Jeff Mallett, currently Yahoo's president and chief operating officer, could resign since he was passed over for the top spot. Management turmoil could indicate that there's more to Yahoo's problems than macroeconomic conditions.

Cutting estimates
Analysts cut their earnings targets across the board, but didn't change ratings much. Many analysts had already cut their ratings on Yahoo.

Jeffrey Fieler, an analyst with Bear Stearns, stuck to his "buy" rating for Yahoo. "We believe that those investors that are patient and take advantage of current share prices will be rewarded," he said. "We continue to be buyers of the stock in spite of near-term earnings disappointments and the concomitant expectation that this will pressure the share price."

Nevertheless, Fieler cut his 2001 targets. The analyst is predicting Yahoo will report a loss of a penny a share in the first quarter on sales of $177 million. For 2001, Fieler cut his earnings target from 45 cents a share to a penny a share. He lowered his revenue forecast to $825 million from $1.2 billion.

W.R. Hambrecht analyst Derek Brown cut his estimates on Yahoo for the second time this month. He's projecting revenue of $791.7 million in 2001, compared with his previous estimate of $1.18 billion. Brown projects earnings per share of 5 cents, compared with his previous estimate of 39 cents. For 2002, he projects earnings of 17 cents a share on sales of $1.07 billion.

"We continue to suggest that investors remain on the sidelines until 'the smoke clears,' " Brown said.