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Wall Street pans Yahoo''s outlook

4 min read

Wall Street analysts came down hard on Yahoo! (Nasdaq: YHOO) after the company lowered its 2001 outlook. Although analysts called Yahoo a strong bellwether, many said the portal should rework its business model.

Shares were off 15 percent, or 4.53 to 25.97, after the company met earnings expectations, but cut its outlook for 2001.

Yahoo, which relies primarily on ad revenue, brought down a few of its peers. Analysts downgraded CNET (Nasdaq: CNET), publisher of this Web site, and NBCI (Nasdaq: NBCI) following the Yahoo results. Yahoo rivals also took a hit as Terra Lycos (Nasdaq: TRLY) slumped 0.88 to 11.75.

Calling Yahoo's bluff?

While analysts were taken aback by the company's 2001 outlook, many were quick to call it a bluff. Yahoo said it expected 33 cents to 43 cents a share in the fiscal year, far below the Street's consensus of 57 cents a share. Yahoo said it expected sales of only $1.2 billion to $1.3 billion, far below the Street's number of $1.42 billion.

Bear Stearns analyst Jeffrey Fieler, who maintained a "buy" rating and $75 price target, believed the company was lowballing Wall Street. "We believe the company guided so low as to never have to guide lower again," Fieler said in a research note.

J.P. Morgan analyst Paul Noglows, who maintained a "long-term buy" said that the company "has slashed estimates to the point that it will be able to (meet estimates) regardless of how difficult a market presents itself in the first half of the year."

Yahoo is suffering because it still relies on pure-play dot-coms for a big chunk of revenue. Although it whittled down dot-com sales to 33 percent of total revenue in the fourth quarter, down from 40 percent in the third quarter, most analysts said it has a lot of work to do to diversify.

Analysts said they bought into Yahoo's prediction that it could rebound in the second half as traditional advertisers begin to occupy the bulk of its revenue. In the long run, online advertising will work.

"Our estimate reductions are meant only to reflect near-term conditions and should not be interpreted as an indictment of the long-term viability of online advertising," said WR Hambrecht analyst Derek Brown. Brown reiterated his "neutral" rating said investors should remain on the sidelines until "the smoke clears."

Brown noted that marketer and advertiser demand for Yahoo's services strengthened sequentially; 3,700 companies advertised on the company's network in the fourth quarter, representing a recovery from the substantial drop recorded in the third quarter. "We continue to believe that mainstream advertisers will aggressively follow consumers online," Brown said.

Yahoo worth $15 a share

Noglows predicted Yahoo's guidance will send its stock reeling, along with the rest of the Internet media sector, and said that according to traditional valuation metrics, it "could conceivably trade down to $15 per share."

UBS Warburg analyst Christopher Dixon gave Yahoo! a rare "reduce" rating, down from "strong buy."

Dixon called the company's citation of the slowdown in advertising for its reduction in 2001 guidance as "an act of denial to a shifting market for Yahoo!'s business model."

He put a target of $14 to $15 a share on the stock and would "look to sell Yahoo! shares and look for evidence of a turnaround or a significant improvement in management's ability to articulate a new business plan before considering returning."

"Management's outlook for 2001 point to a company struggling to develop a new business model that can unleash the promise of the Internet," Dixon said. With no segment reporting and no clearly articulated business divisions, he said things will get worse for internal management teams or investors to determine what kinds of return on investment can be generated.

Dixon cited the company's call for "gaining market share" as an example of its ambiguous model. Yahoo never defined whether it intends to gain share from traditional advertising platforms, from direct marketers, from enterprise solutions or hosting services providers like Microsoft, Oracle, Sun or Exodus, or "solely from under-capitalized Internet wannabes left in the gutter," the analyst said.

Deutsche Banc Alex. Brown analyst Andrea Williams Rice also lowered her rating on Yahoo! -- to "market perform" from "buy," and set a price target of $14 a share.

"We have a dim outlook for near-term stock performance, and heightened uncertainty due to dependence on growth from immature revenue streams," said Rice. "Expect investors to take a wait-and-see attitude until new revenue streams prove themselves."

• Yahoo lowers 2001 earnings, sales targets
• THE DAY AHEAD: Is Yahoo lowballing Wall Street?>