After high-flying Yahoo crushed second-quarter earnings estimates last week, fans of the company heaved a collective sigh of relief.
Yahoo second-quarter results
A premier Internet content aggregrator, or "portal," Yahoo on July 8 reported record second-quarter operating results of 15 cents per share, on a 192 percent increase in revenue to $41.2 million. The bottom line blew away Wall Street's prevailing consensus estimate of 9 cents a share. Meanwhile, page views--a key indicator for the search engine company--improved dramatically as well, to 115 million per day in June from 95 million in March, disproving many analysts' expectations of a slowdown in Web surfing activity due to the beginning of the summer vacation season.
Given its recent accomplishments, it's fair to ask what Yahoo, in specific, and Internet portal stocks, in general, can come up with next. For Yahoo, there is no consensus among analysts. Following the company's earnings announcement, Paul Noglows of Hambrecht & Quist downgraded the stock to "hold" from "buy" "based solely on valuation." Noglows cited the stock's 82 percent appreciation during the previous five-week period as his main area of concern. "[We] believe that it will be increasingly difficult for investors to recognize the return on investment in this stock...even in light of improving fundamentals," he said.
BT Alex Brown sees Yahoo reaching $230
Meanwhile, Shaun Andrikopoulos, an analyst with BT Alex Brown, reiterated his "strong buy" recommendation on Yahoo stock, on which he has a 12-month price target of $230. Andrikopoulos raised his revenue estimates on the company for fiscal 1998 and 1999 to $165 million and $270 million, respectively, from $146 million and $240 million. He also upped his earnings estimate for fiscal 1998 to 61 cents per share from 42 cents per share, and his fiscal 1999 forecast to 90 cents per share from 75 cents per share. According to Andrikopoulos, Yahoo's valuation of 48 times BT Alex Brown's 1999 revenue estimate is "well deserved."
Judging by market reaction on July 9, investor enthusiasm over Internet portal stocks has peaked, at least temporarily. Early that day, Yahoo jumped almost 10 percent, to $204, but later retreated to $184, posting a 1.2 percent loss on the day. Shares of other leading portal site companies also pulled back: Lycos dropped 9 percent, to $70.94, Infoseek fell 6 percent, to $32.44, and Excite declined 10 percent, to $82.25.
Investments in Net portals fuel stock run-up
The primary reason for last month's run up in Internet stocks was a wave of announcements of strategic investments in Internet portals by major media companies. It appears that this rally may have come to an end, at least until the next round of consolidation. Although it is possible that other catalysts could emerge--after all, this is a new frontier in technology as well as in investing--a 20 percent to 25 percent correction might well be around the corner.
Individual Investor Online is a periodic contributor to CNET NEWS.COM.