Yahoo!: Buy the Mystery, Sell the History

Shares of Yahoo! (YHOO) rose 6% on Wednesday, after the Internet company posted in-line fourth-quarter results and a weak outlook relative to expectations. Why are investors cheering?

Yahoo didn't blow up. (phew)

Yahoo's huge traffic may finally start getting monetized earlier rather than later

Late Tuesday, Yahoo CEO Terry Semel said the company is releasing its Panama advertising platform early: Feb. 5 is now the target date. If it happens, and if it is successful, indeed, there is significant upside for Yahoo!. Google's (GOOG) searches receive far more clicks than Yahoo's searches. One investor estimates that while Yahoo makes slightly more money than Google per search ad, Google receives twice as many clicks per search than Yahoo, and that the effective revenue per search is therefore 150% that of Yahoo's. So, if Yahoo can improve the click-through-rate -- by improving its ranking system - then you can imagine how much more upside there is for Yahoo.

Anyone buying post earnings report - if they're not short covering - is buying in anticipation of potentially good news. And, it may not be a bad entry point given that Yahoo collapsed 36% last year and is currently trading at the same price to cash flow multiple as traditional media companies. Additionally, Yahoo trades at half the multiple that Google trades at.

But I'm just a humble scribe. According to Ben Schachter, UBS analyst:

The bottom line is that we think investors want to believe in Panama and that this management team can execute. We think that sentiment will improve on the heels of the Panama launch. While there are sure to be bumps in the road as the new technology is released, we continue to believe that investors will be rewarded as Yahoo moves forward in 2007, and Panama begins to show tangible results.

YHOO 1-yr chart: