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Is this rally for real?
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October 11, 2001: 5:25 p.m. ET
The Nasdaq has gained back all its losses since Sept. 11. But is it safe to get back in yet?
By David Futrelle
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NEW YORK (CNNmoney) - No, the behavior of tech investors is not the strangest thing I've seen all week. (That honor goes to the posters spotted at pro-Taliban demonstrations in Pakistan that feature one Osama bin Laden sitting alongside none other than...Sesame Street's Bert.)
But the exuberant reaction of investors to some decidedly less-than-exuberant tech news is plenty peculiar.
Think about it: On Tuesday, the courts denied Microsoft's appeal in the government's antitrust case, and analysts were busy slashing their earnings estimates for EMC. Wednesday morning we heard Motorola's rather blah outlook for semiconductor sales and Yahoo's vague promises of a restructuring. (After the bell on Thursday, Juniper Networks announced results that beat estimates, but even there, earnings growth was negative and revenue growth was flat -- see "Juniper beats the Street.")
And how did tech investors respond? The Nasdaq put together two nice rallies on Wednesday and Thursday, with huge gains in semiconductor stocks both days (6.7 and 7.7 percent spikes, respectively). In fact, at 1,696.95, the Nasdaq has wiped out its all its losses since trading resumed after the Sept. 11 World Trade Center attack.
Let's look at the evidence
When I examined Motorola's results on Wednesday (see "Do you feel lucky?"), it looked to me like tech stocks had gotten ahead of themselves. And looking at Yahoo's results, today, I don't feel much better.
Last night, Yahoo (YHOO: up $1.57 to $12.50, Research, Estimates) reported results that by any reasonable definition would have to be called lousy. The company posted a third-quarter net loss of $24 million, or 4 cents a share, its fourth quarterly loss in a row. Revenues in the quarter were down 44 percent from a year earlier. And the company now says fourth-quarter revenues will likely come in between $160 and $180 million, considerably lower than the $190 million analysts had been expecting.
Hardly good news. But apparently relieved the numbers weren't far worse, investors responded to the news with, well, a hearty "Yahoo!" Shares shot up some 12 percent Thursday, to more than $12 -- on top of a pretty hefty runup Wednesday.
Indeed, the stock, which dropped into the single digits in the wake of the September attacks, is now up roughly 50 percent from its low of $8.11 on September 26. At current prices, Yahoo trades at more than 240 times estimated 2001 earnings and more than 100 times estimated 2002 earnings -- and analysts have already started cutting their estimates for next year.
Bad business
Yahoo isn't just expensive -- it also faces serious challenges. Unlike rival AOL (AOL: up $1.57 to $33.91, Research, Estimates) (the parent company of CNNmoney), which takes in serious subscription revenues, Yahoo! is still dependent on advertising for 80 percent of its revenues. Yet the online ad market is in a deep slump, with no signs of a revival.
Indeed, many of the banner ads you see on the site today are in-house ads for Yahoo! sites and services. When I went to look up some recent headlines about Yahoo! (the company), on Yahoo! (the website), the ads that popped up were for a Yahoo! Platinum Visa Card and an ad offering free coupons from Coolsavings -- an unprofitable dotcom with a stock price of 15 cents.
Though the company has talked for some time about its need to move beyond the troubled advertising model towards subscription-based "premium services," it's made little progress on that front. On the conference call, Yahoo! CEO Terry Semel provided few details about Yahoo!'s future and only the vaguest hints about the reorganization and cost cutting plans set for November.
Sure, in the current environment, no tech company can predict the future with any certainty. Investors putting money into any tech stock at this troubled juncture are doing so, at least in part, on faith.
But there's faith and there's faith. It's one thing if a company can lay out a plausible case for an eventual comeback. That may be the case with Cisco (CSCO: up $1.31 to $16.46, Research, Estimates) and Dell (DELL: up $1.75 to $24.97, Research, Estimates).
But buying Yahoo! today looks less like a leap of faith than a swan dive into a pit of quicksand. 
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