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Are investors a bunch of Yahoos?
The Internet giant reported a spectacular 2Q but shares sunk. Why? Expectations were way too high.
July 8, 2004: 12:11 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Uh-oh.

Yahoo! reported second-quarter earnings Wednesday that were ridiculously good. It's hard to quibble with a nearly 90 percent increase in sales and a doubling of profits.

But in the wacky world of Wall Street, these numbers just weren't good enough. Yahoo! missed the "whisper numbers." It reported earnings of 8 cents a share but there was trader chatter about how profits could hit 10 cents a share.

As a result, shares of Yahoo! (YHOO: Research, Estimates) got slapped harder than Charlie Murphy (yup, Eddie's brother) was by Rick James on Chappelle's Show. (If you don't watch, you should. "What did the five fingers say to the face?")

The stock was down nearly 6 percent Thursday morning and dragged down shares of fellow Internet search rivals Ask Jeeves (ASKJ: Research, Estimates) and InfoSpace (INSP: Research, Estimates) as well as other big Net stocks like eBay (EBAY: Research, Estimates) and Amazon.com (AMZN: Research, Estimates).

For that matter, tech stocks in general sunk anew on Thursday. Of course, it didn't help that software developers Siebel Systems (SEBL: Research, Estimates) and BMC Software (BMC: Research, Estimates) added their names to the ever-growing list of companies issuing ugly warnings.

Curb your enthusiasm

So what it's all about, Alfie? Do Yahoo!'s results, when viewed in the backdrop of all these tech profit disappointments, really signal that the tech sector is in for some troublesome times during the second half?

Yes and no. As I wrote on Tuesday, Yahoo! is in fantastic shape. The company's second-quarter results do not change that view. Internet advertising is still a booming business.

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The problem with Yahoo!'s earnings report was not the company's fundamentals but that since Yahoo!'s valuation was patently absurd, it had a lot to live up to. And it failed to meet the insanely high expectations of greedy momentum investors.

Before the results, the shares were trading at about 100 times 2004 earnings estimates. That's laughably rich. Yahoo! needed to beat, not simply meet, estimates to justify that P/E. It didn't. Hence the bloodletting.

Still, even after Thursday's big drop, the stock trades for about 90 times 2004 estimates. So Yahoo! hasn't suddenly become a bargain. Considering that Yahoo! is going to face tougher competition from Microsoft and the soon-to-be-public Google in search, that P/E might still be too high as well.

Just keep in mind that pointing out that tech stocks like Yahoo! are expensive is not the same thing as being an outright doom-and-gloom tech bear.

Tech isn't in a tailspin

It does not look like the economy is suddenly taking a turn for the worse and that we're about to have a repeat of the ugly 2000-2002 tech bear market when demand for tech products and services fell off a cliff.

Fundamentals still look strong and investors should try to remember that once we're hit with the monsoon of earnings reports in the next few weeks.

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And as we head into the thick of earnings season, it would be nice to see expectations for stocks like Yahoo!, and many other techs for that matter, retreat to more rational levels. That's why I think that the latest round of earnings warnings is actually not a bad thing.

It should serve as a welcome reminder to investors that the go-go days of the late '90s are gone for good. Tech investors can't continue to expect companies to continually guide earnings and sales estimates ever higher, ad infinitum. That just defies every law of economics.

What's more, Yahoo!'s latest results should hopefully help put an end to this whole silly notion of whisper numbers.

What point is there in having consensus Wall Street estimates if the market is going to simply add a penny or two to earnings projections and a couple of million dollars to revenue targets and demand that companies meet these highly inflated forecasts?

Finally, it's also worth noting that the opening drops for Yahoo! and other Nets were actually much worse on Thursday morning. At one point, Yahoo! was down as much as 11 percent.

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By Paul R. La Monica

Shares bounced back from their lows as the day wore on. And that's probably a good thing. That's because Yahoo! didn't do anything wrong, except fail to live up to ludicrously high hopes.

Hopefully, the market will learn from Yahoo! Second-quarter tech earnings should be good, but not gangbusters. Ditto for third-quarter guidance. The quicker that investors realize this, the better.

If expectations come down, techs have a good chance of pleasantly surprising investors in the second half of 2004. But if investors start wanting more again, they can expect techs to keep "disappointing."


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.