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Yahoo!s new deal
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January 11, 2002: 4:08 p.m. ET
The Internet portal may well be on the road to recovery, but it's still a pricey stock.
By David Futrelle
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NEW YORK (CNN/Money) - Struggling Internet portal Yahoo! is making some progress in what promises to be a long and difficult turnaround. But many investors are acting as though Yahoo!'s comeback were a done deal. After bottoming out in late September, Yahoo! shares have since more than doubled as investors and analysts alike have convinced themselves that the Internet giant has made real progress in its attempts to return to profitability. And some expect the run to continue.
In a late December research note, issued just days before he left his job at Merrill Lynch to write a book, net bull Henry Blodget suggested that the company's shares would "trend modestly higher over the next year as a result of recovery in advertising spending, growth of other revenue streams, and low expectations."
Well, one man's low expectations are another's impossible dream. In fact, Yahoo!'s (YHOO: down $0.33 to $20.16, Research, Estimates) shares, pumped up after their recent run-up, now trade for a startling 14 times sales -- not earnings, of which Yahoo! currently has none. That's nearly as lofty a price/sales ratio as the enormously profitable Microsoft -- and about four times higher than Yahoo! rival AOL Time Warner (AOL: down $0.71 to $30.69, Research, Estimates) (parent company of this website). And this is for a company that doesn't expect to return to profitability until 2003. Say what you will about Yahoo!, but only a Henry Blodget could say, with a straight face, that expectations surrounding this stock are anything but elevated. In order to justify its current price, much less "trend modestly higher," Yahoo! is going to have to deliver on its promises -- and then some.
It's been clear for some time that Yahoo!'s old business model is broken. Back in the day, Yahoo! was able to take in enough money from online ads to become one of the first (and one of the few) profitable dot.com companies. But with many dot.com advertisers out of business and others cutting back on ad budgets, those days are long gone. Now the company is essentially trying everything it can think of to translate eyeballs into cold hard cash. Last year, roughly 76 percent of the company's revenues came from ads. Yahoo! says it wants that percentage to shrink to 50 percent over the next few years.
True, the company has made some progress in its attempts to move beyond its unhealthy dependence on banner ads. Its purchase of Internet job site HotJobs, which takes in the bulk of its revenues from listing fees, should help Yahoo! accelerate its moves towards a more diversified revenue stream. As should its recent deal to sell co-branded DSL Internet access with telecom giant SBC Communications.
But the company is still struggling to figure out ways to turn its many visitors into paying customers, and the "premium" services it has rolled out so far -- like streaming stock quotes and fantasy football -- have so far attracted only a small number of subscribers. Last year, money from services like these made up less than 5 percent of Yahoo!'s revenues. And it's far from clear that many users would be willing to pay for much of what Yahoo! now offers for free.
"There is nothing to be embarrassed about being profitable," Yahoo! CEO Terry Semel recently told the New York Times. Well, no. But at the moment, discussions of Yahoo!'s profitability are only theoretical. As Yahoo!'s recent run-up makes clear, Semel isn't the only Yahoo! booster with a vivid imagination.
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