Yahoo Earnings: Too Much Could Go Wrong

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Deutsche Bank is out cautious on Yahoo! (NASDAQ:YHOO), noting that with US page view declines of 9% YoY in 3Q and search volumes slowing to the single-digit range, they think that shares are likely trade toward the mid-$20s post earnings.

Firm expects Yahoo! to report 3Q results on Tuesday in-line to slightly below expectations, as a US traffic decline of 9% (vs. -5% in 2Q and +9% in 1Q) and search volume slowdown may pressure growth. They think that their revenue/EBITDA forecast of $1.26bn and $436mn may prove a little difficult due to slowing search vol. growth. These issues, coupled with the potential for future display ad weakness and a re-worked AT&T contract, could place pressures on '08 growth prospects. As such, they think that Street estimates of 16% growth may be difficult to achieve for Yahoo!

DB's recent discussions with folks in the online media industry would suggest that some online advertising weakness may be ahead for the industry and display ad oriented companies such as Yahoo! While 3Q online ad spending was generally solid, the fallout from the financial services and mortgage industries may be a key risk in coming quarters.

Also, they believe that Yahoo!'s existing access partnership with AT&T may be re-worked to reduce the payments made by AT&T to Yahoo! on all new subs brought into the deal. There appear to be at least three other companies that have submitted proposals on the AT&T contract, thereby providing for a truly competitive situation for Yahoo! All in, the firm thinks that more than $200mn in EBITDA (high margins) may be at stake for Yahoo! on its access partnerships.

Maintains Hold and $24 target.

Notablecalls: This is a pretty sensible call from Deutsche ahead of YHOO's Oct 16 results. I was a YHOO bull 3-4 bucks below Friday's close but would I want to stay long it ahead of quarterlies? Not really. Too much could go wrong here.

Sitting at my old desk, I would put out a short line in YHOO this AM, looking to cover somewhere below the $28 level. I suspect the stock will gap down following Deutsche's call, so I'd be actively shorting the pre-market.