ANALYST WATCH: Reversal of fortune unkind to Yahoo!

4 min read

Nothing better illustrates the panic and uncertainty surrounding technology stocks these days than Yahoo!'s unceremonious slide to a 52-week low this week despite topping analysts' sales and earnings estimates in its third quarter.

At a time when companies such as Intel (Nasdaq: INTC), Apple (Nasdaq: AAPL) and Lucent Technologies (NYSE: LU) are warning they won't come close to meeting their revenue targets this quarter, Yahoo! (Nasdaq: YHOO) steps up and beats even the most optimistic estimates and still gets punished.

Before everyone starts screaming into their monitors, I realize Yahoo! didn't provide much encouraging news going forward. But if this exact same earnings report and cautious outlook had happened even a year ago, you can bet Yahoo! shares would be trading closer to their 52-week high than a 12-month low.

That's what makes the flood of analyst comments and downgrades this week so intriguing.

Don't kid yourself.

There was a great deal of concern that Yahoo!, the shining star of the Internet sector, might actually miss sales and earnings targets for the first time in its relatively brief existence. The fact that bogus online companies were either going out of business or desperately clinging to life and unable to pony up advertising dough was a legitimate concern.

It still is.

Analysts want to see Yahoo! get more mature clients on board. And Yahoo!'s doing that both in the U.S. and abroad.

In the quarter, it earned $81.1 million, or 13 cents a share, on sales of $295.5 million.

Most analysts were expecting a profit of 12 cents a share and sales of between $280 million to $290 million.

Page views of 780 million a day in September and unique users of 166 million were both higher than most envisioned.

Yahoo's top 200 clients made up about 60 percent of the company's revenue in the third quarter, with longer contracts that help offset a "modest" decrease in total advertisers and merchants to 3,450.

Yet, here's Yahoo! trading at $55 a share after peaking at $250 back in January.

ABN AMRO's Arthur Newman cut his 2001 revenue estimate following the earnings report and company conference call, pointing out that Yahoo!'s operating margin fell about 360 basis points from the fourth quarter of 1999 to 36.1 percent.

"Our principal concern remains Yahoo!'s valuation premium, particularly in light of our forecast of a major deceleration in EPS growth in 2001," Newman said in a research report.

For the record, analysts are expecting a profit of 13 cents a share in the fourth quarter and 59 cents a share in fiscal 2001.

Prudential Securities analyst Mark Rowen took the road less traveled this week, upgrading the stock from an "accumulate" rating to a "strong buy." He also reiterated his 12-month price target of $155 a share.

"We believe that Yahoo! has the strongest business model on the Internet," he wrote in a research note. "Furthermore, at current price levels, we think the stock has a better risk/reward ratio than we initiated coverage. Also, we see the early signs of traditional advertisers moving ad budget's online."

Rowen was clearly in the minority this week as SG Cowen, Janney Montgomery Scott, Dain Rauscher Wessels and First Union Securities all downgraded the stock following the earnings report.

"While these results indicate that Yahoo is 'weathering the storm' the fact remains that the company is still in the middle of a fairly nasty storm,'' W.R. Hambrecht analyst Derek Brown wrote in a research report.

CS First Boston analyst Jamie Kiggen started coverage of Yahoo! with a "hold" recommendation and a six- to 12-month price target of $100 a share.

Merrill Lynch's Henry Blodget didn't upgrade or downgrade the stock, but he was also pleased but the company's inroads into the top levels of the Fortune 500.

"Although the company still has significant dot-com exposure, we are impressed with the progress made with traditional advertisers, as well as the trajectory of the non-dot-com revenue growth rate,'' he wrote in a research report.

"The risk for Yahoo is not that it won't get paid, but that growth will slow dramatically if it has to continue to replace revenue from weak customers while at the same time experiencing slower spending increases from its strong customers.''

Meanwhile, Yahoo! continues to expand its brand throughout the world while improving its total page views and advertising revenue.

Anyone who thought Yahoo! was built on the backs of companies that might as well be called boguscrap.com is sadly mistaken.

Just as Yahoo! didn't deserve the incredible valuation it was getting back in January, it certainly doesn't deserve to be trading below $60 a share this week after posting 90 percent sales growth from the year-ago quarter.