While everyone is trying to sort out whether or not Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) are still talking (TechCrunch, yes; Reuters/CNBC, no; New York Times, no; CNET, maybe; Kara, they should be; Silicon Alley Insider, talks on selling search, not full takeover) Thomas Weisel analyst Christa Quarles today turned her focus to Yahoo’s fundamentals. And she did not like what she found.
Quarles cut her rating on the stock today to Underweight from Market Weight, and chopped her price target on the shares to $18 from $28.
“Until we see major action as it relates to organizational hurdles, product improvements and the re-acceleration of organic revenue, we believe it could be difficult for Yahoo’s stock to appreciate,” she wrote in a research note. “The looming reorganization will be Yahoo’s third over the past 18 months and will likely be met with skepticism until management can demonstrate tangible, fundamental improvements.”
Quarles contends Yahoo has lost its consumer focus. “What does Yahoo do better than anyone else?” she asks. “As a media company, the better question is, what is Yahoo’s content strategy? Mail does not make a content strategy.” She rattles off a to-do list for the company:
- “We want to see Yahoo’s products become more consumer friendly and for new products to work well the first time.”
- “We should see links to more popular Yahoo services such as Flickr on the home page.
- “We shouldn’t need Google to find content on Yahoo.”
- “We want Yahoo to treat its brand with sanctity and not allow proliferation of new products under its brand umbrella to occur unless they work well, no matter how positive the ROI.”
- “We want Yahoo to dominate the global sports and finance content markets.”
- “And speaking of mail, clear out some of the ads and make it cleaner.”
Quarles also notes that the company is accomplishing little with its M&A strategy; she notes that over the last 18 months Yahoo has spent $1.7 billion on acquisitions - and that over the same time period she has cut her 2008 revenue forecast by $784 million.
Quarles expects Yahoo to report 2008 revenue of $5.64 billion, with EBITDA of $1.892 billion and pro forma EPS of 44 cents; she is below the Street at $5.744 billion/$1.928 billion/48 cents. More striking is how far below the consensus she is for 2009: Quarles sees $6.121 billion, $2.039 billion and 48 cents, while the Street sees $6.527 billion/$2.279 billion/62 cents. She contends the Street’s 2009 numbers are too high and that adjustments could have negative implications for the stock.
YHOO today closed at $22.04, up 4% over its morning open; the stock earlier today traded as high as $23.71.