Sell-Side Reaction to Yahoo’s Q3 Earnings 2: Derek Brown, Pacific Growth Equities (YHOO)

| About: Yahoo! Inc. (YHOO)

Excerpts from Pacific Growth Equities analyst Derek Brown’s note to clients in reaction to Yahoo’s earnings last night:

No Real Surprises In Q3:05; Modestly Increasing Ests; Maintaining Buy Rating


• Yesterday, Yahoo! posted solid Q3:05 results that exceeded our/consensus ests and the higher end of mgmt guidance

• Healthy growth in online advertising and impressive gains in fee-based rev streams drove organic growth of 40% y/y, while OIBDA margins were above expectation at 29.0%

• We are tweaking our ests higher on generally in line guidance and maintaining our Buy rating at current levels


Yahoo! currently trades at a 2006 P/E ratio of 43.4x, EV/Net Revenue ratio of 10.3, and EV/OIBDA ratio of 32.2x. While these multiples are fairly rich by most measures, we think investors will — and should — look through them as we expect the stock to work higher, given what we see as the Company’s category dominance, solid growth prospects, and strong operational performance. Moreover, we continue to believe that we are in the midst of an inflection point for Yahoo! — and the online advertising industry, in general — that finally pushes Internet marketing into the mainstream and sets the stage for robust growth, expansion, and marketshare gains for the Company for years to come. Reflecting these factors, we reiterate our Buy rating on Yahoo!’s shares.