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 (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 (C) is reducing its advertising for the rest of the year and add that she has “heard rumors” that American Express (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 (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.