NEW YORK (CNN/Money) -
Yesterday on CNBC I heard one money manager casually refer to Yahoo as a "must-own" name in the Internet sector.
Let's be frank here: Yahoo is a must-own stock only in the sense that Mariah Carey's "Glitter" is a must-see movie. The reviewers at Entertainment Weekly convinced me that "Glitter," which tells the rags-to-riches tale of a Mariah-esque pop star, would be great campy fun. Sadly, I can recommend "Glitter" only to movie lovers with an exceedingly perverse sense of humor and a willingness to endure great pain.
That's more or less my position on Yahoo, the main difference being that you can rent "Glitter" for three or four bucks. Yahoo is going for roughly 6 times that.
Even the $18 stock price doesn't get across just how expensive Yahoo is. The company reports earnings after the bell on Wednesday, and analysts expect earnings of 2 cents a share. For the year, they expect a dime. At current prices, that gives Yahoo a P/E ratio of 185.
On a price-to-sales basis, Yahoo is the sixth most expensive stock in the S&P 500, trading for a staggering 15 times sales.
Are we being too rough?
Fans of the stock will say it's unfair to fixate on Yahoo's current earnings. It's a tough time for tech and Yahoo, still dependent on advertising revenue, is transitioning to a new business model in which it actually charges for "premium' services.
Some analysts see nothing but opportunity ahead. "We believe that Yahoo has one of the largest and most steadily growing under-monetized user bases in the world," Morgan Stanley Internet fanalyst Mary Meeker chirped in a research report issued, somewhat ironically, this April Fool's day.
Meeker thinks investors should "overweight" the stock, which has already more than doubled from its September lows.
So what is Yahoo doing to transform its users into nice little streams of cash? Yahoo has big hopes for Yahoo! Shopping and subscription music services. It recently swallowed up HotJobs, a job-listing site that makes money by charging would-be employers listing fees.
The company currently extracts payment from stock jocks for an assortment of "real-time" market information, and will soon start charging Yahoo e-mail users for remote access to their accounts.
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And last week Yahoo announced the launch of Yahoo! Games All-Star, a $8 a month subscription service that will give online gaming addicts access to "premium ladder systems [and] customized avatars," among other things. I have no idea what any of that even means, much less why it would be worth $8 a month. Presumably Yahoo's intended audience does.
I don't doubt that these various initiatives will be able to generate some money for Yahoo. The question is how much. And in this regard most analysts are a good deal less sanguine than Meeker.
For 2003, analysts expect Yahoo to generate only 20 cents in earnings (which would give Yahoo a 2003 P/E north of 90). Beyond that? Legg Mason analyst Thomas Underwood wrote in a recent research note that he's "not confident in Yahoo's ability to generate earnings per share above 25 to 35 cents annually...in the next three to four years." He suggests that buying the stock for more than $10 a share would be a mistake.
If you must own Yahoo, I guess you must. But I really think you'd do better just renting "Glitter."
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