Yahoo: The Overvalued, But Core, Internet Holding

Brian Bolan, research analyst at Jackson Securities, sent a note to clients updating estimates on Yahoo! (YHOO). Key excerpts follow:

Quick Discussion

Following a less than stellar earnings report, we are adjusting our estimates on Yahoo!. We trimmed the top line estimate for the remaining quarters. Our share count number has also been relaxed. For the calendar year 2007, we are slightly ahead of the consensus estimate on the top line, but a full two cents lower than consensus on the bottom line. Our previous estimates were simply too aggressive and our lowered expectations for second half of the year are reflected in the new numbers.

Yesterday the company announced that it will acquire the remaining 80% of Right Media for $680M following an initial purchase of 20% of the company for $40M in October of 2006. To fund the transaction, Yahoo will use 50% stock and 50% cash. There is no “earn out” clause associated with the transaction. Simply put, what once cost $200M now goes for about $850M.

There is some anecdotal evidence that Right Media is gaining traction with publishers, however, it may be some time before the idea of an exchange really takes off. On the conference call, Yahoo! disclosed that Right Media is expecting $70M in revenue in 2007 which will be more than double the 2006 number which was not released. Being still in start up mode, Right Media expects to break even in 2007 and become free cash flow positive in 12 months. Another key stat that was disclosed was that the Right Media exchange handles some 6 billion transactions a day, and they have a7% charge on each transaction.

We note that our target price is still below the current stock price, yet we maintain a hold rating. We have been asked several times why that is the case and shouldn’t the stock be a sell if our target price is below the current price. We believe that Yahoo!, while currently overvalued, is a core internet holding, and thus not a stock that one should buy or sell based on price targets alone.