Yahoo Fundamentals Deteriorating - Collins Stewart

More trouble lurks ahead for Yahoo (YHOO), Collins Stewart analyst Sandeep Agrawal warned this morning.

“We believe that the fundamentals at YHOO are deteriorating,” he writes in a research note. “On the one hand, economic headwinds and turmoil in the financial markets are causing weaker display ad revenues. On the other hand changes with the minimum bid with search and a possible GOOG/YHOO deal are causing an outcry among many advertisers. To further complicate the situation is an ongoing loss of talent which might accelerate with renewed restructuring efforts. We don’t see any near-term upside in the shares of YHOO on a fundamental basis.” Agrawal does say that he would not rule out a deal with Microsoft (MSFT) in the future. But he also says that Street estimates are likely to come down. He maintains a Hold rating on the stock, and puts fair value at $21.

For Q3, he trimmed his revenue estimate this morning to $1.364 billion, from $1.38 billion. He cuts GAAP EPS to 8 cents from 9 cents, while pro forma stays at 16 cents. For 2008, revenue drops to $5.567 billion from $5.598 billion; GAAP EPS stays 41 cents, but pro forma EPS drops a penny to 69 cents, from 70 cents.

YHOO today is down 20 cents, or 1%, to $19.

Comments

[tedstr:]

Yahoo's problem like many other portals and vertical publishers is that management still thinks and acts like it is 1998. As amazing as it sounds, after only 10 years, the internet is starting to look like a mature industry. Certainly the media driven businesses like Yahoo are entering a mature phase where you don't need 100 Stanford MBAs running around playing M&A masters of the universe.

If all these companies, Yahoo may be at the head of the class, would dump a couple thousand of these folks and simply focus on the dull business of publishing and ad sales, they could have a really great business.

2008 Sep 26 02:45 PM

[Chris B:]

YHOO is another stock that I would never buy because of my investing thesis of never buying a company with an inferior product. YHOO's search is inferior to GOOG, has been for years, and there is no reason to believe it will ever be improved if 10 years and hundreds of millions of dollars haven't done it yet.

MSFT, F, and GM are other examples. Each sells an inferior product for too much money (too much, even if at a loss) while their loss of market share to superior competitors accelerates. Meanwhile, years, or decades, have passed and the fundamental problems have not been remedied.

Even if there are no obvious competitors yet, companies with crappy products are perfect bait for the sudden emergence of a GOOG that will destroy them.

The moral of the story: know your company's products.

2008 Sep 26 04:10 PM

[David Filo:]

While I agree on your search comments, Yahoo! actually has a rather superior display product and continues to innovate well beyond it's display peers.

2008 Sep 27 10:08 AM

[garykline:]

I believe that Collin ought to re-examine his belief system. . For searching I will continue to hang with Google--their ad technology underwrites part of my website. They've done search better than anyone so far. But for many other forms of news, information, and *fun*,-- and more --, Yahoo has it in spades.

2008 Sep 27 10:26 PM

[byrnemm:]

While Google certainly has the search edge I think that is a much too limited view of the GOOG v YHOO spectrum.

I think it would be deceiving to place too much emphasis on search capabilities. Most browsers have a little search icon on the top right that you can search google with without needing to go to their home page. In terms of their other facets, YHOO is vastly superior - my yahoo! is much, much better than iGoogle, Yahoo!'s finance pages are much better, and Yahoo! has the edge in most other categories other than search. It is also easier to put a gadget for gmail on your my yahoo page than vice versa.

The new google phone and android system, however, puts an entirely different spin on things and that is well beyond my scope. Since this article is about Yahoo!, I would ponder what Microsoft's plans would have been if it had acquired Yahoo!, and whether Yahoo can accomplish those things on its own.

2008 Sep 28 01:38 AM

[Chris B:]

YHOO may have the edge in content, but GOOG could deploy a couple hundred million and erase that lead within a couple of months. What would stop them? What resources could YHOO deploy to match that?

Thus....
YHOO = AOL circa 1999

2008 Sep 29 01:40 PM