Mary Meeker, the Internet analyst at Morgan Stanley, isn’t ready to cut her numbers on Yahoo, and thinks the stock has become something of a bargain. She does say that the Yahoo news could have ripple effects, but she doesn’t seem all that worried:
Could the Yahoo! ‘news’ also be impacting other online advertising companies? Sure, especially for broad-based brand adverting beneficiaries. That said, we maintain our view that secular trends for online advertising remain strong and that ongoing growth in improvements in user-engagement combined with ongoing improvements in monetization should bode well for leaders like Yahoo! and Google (NASDAQ:GOOG). Yahoo! readily admits that the monetization of its online advertising platform is sub-optimized - hence the anticipation for Panama and optimism about material monetization improvements in [calendar] 2007. For Google, the steady improvements in the efficacy and monetization of its search queries have been primary reasons it has printed substantial revenue growth – our expectation continues to be that we should continue to see impressive monetization improvements for the company, on average, two out of four quarters – challenge remains, which quarters?
Meeker says that at $25.50, Yahoo’s valuation is “undemanding”… “In particular, we highlight $7.24 per share in non-operating assets, which should provide cushion to the shares.”
In case you were wondering where that number comes from, Meeker explains: “Combining Yahoo!’s $2.65 in cash and equivalents and marketable securities (net of long-term liabilities) per share (excluding restricted cash), the $4.10 per share value in its stake in Yahoo! Japan (which we calculate to be worth $6 billion — 34% ownership of a $21 billion market cap as of 9/18/06, adjusted by a 15% discount to take into account the relative illiquidity of the asset), and the 49 cents per share present value of NOLs, the aggregate per share value of Yahoo!’s non-operating assets is about $7.24 per share.”
Denise Garcia, an analyst at W.R. Hambrecht, asserted in a note today that the online advertising market should still grow 29% this year. But she does confess that there is some anecdotal evidence of issues in the auto and financial sectors, as Yahoo suggested. Garcia notes that Citigroup (NYSE:C) is reducing its advertising for the rest of the year and add that she has “heard rumors” that American Express (NYSE:AXP) may follow suit. She also warns that this could be bad news for online ad networks, in particular 24/7 Real Media (TFSM) and Marchex (NASDAQ:MCHX), both of which boast Yahoo as a large customer.
Yahoo fell $3.25 today to $25.75; in after hours trading it bounced back 15 cents.