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Yahoo's Struggles Show the Perils of Betting on Future Growth

|Includes:Cisco Systems, Inc. (CSCO), LNKD, ORCL, P, YHOO

Yahoo! CEO Carol Bartz was fired today, ending a long-criticized reign at the top of the Internet company.

It's another lesson along the lines of those I wrote about last month: when investors choose high-growth, high-PE companies, they leave a very tiny margin of error. As I noted in that piece, Yahoo! has grown earnings by a factor of seven over the last decade-plus, and has seen its stock price drop some 80% off its bubble peak. Expecting explosive earnings growth for five or ten years -- necessary for the valuations of companies like LinkedIn (NYSE:LNKD) or Pandora (NYSE:P) -- necessarily implies a near-perfect execution of the company's business plan. In addition, macro factors, market factors, competitiors, government, consumer whims -- all must go according to plan.

It's also important to note the difference between a company and a stock. Yahoo! is "the most-visited Web portal", according to the Bloomberg article linked above. Similarly, companies like Cisco (NASDAQ:CSCO) and Oracle (NASDAQ:ORCL) are market leaders, yet have valuations well below those of 2000. 

It's not enough to point out that 2000 was a massive bubble, the likes of which we may not see for a very long time. That's true, but the larger point still holds. When betting on growth, investors need to understand the risks involved, within a company and without.