Wall Street's got a crush on Google but investors may be overlooking the growth prospects of Yahoo!
NEW YORK (CNNMoney.com) - If Yahoo! and Google were brothers, Yahoo! would be Ira Gershwin and Google would be George.
They're both famous. But the older, more experienced Yahoo! (Research) is, like Ira, having trouble escaping the shadow of the younger, more precocious Google (Research)...at least in the eyes of investors.
Both companies have benefited from the boom in online advertising. But while Yahoo!'s stock gained just 4 percent in 2005, Google's shares more than doubled. This year, Google's shares are up nearly 14 percent versus 7 percent for Yahoo!
Analysts expect a strong fourth-quarter earnings report from Yahoo! next Tuesday. But will that be enough to excite investors? It may be tough since Google's growth rate should vastly outshine Yahoo!'s.
Analysts expect Yahoo's earnings to increase 31 percent in the fourth quarter on a 36 percent increase in sales, excluding traffic acquisition costs, or TAC, which are ad revenues that the company shares with affiliates.
But Google's fourth-quarter profits are expected to surge 90 percent while sales, excluding TAC, are expected to nearly double.
For all of 2006, analysts are forecasting about a 30 percent increase in earnings and revenues for Yahoo! while analysts predict that Google's earnings will be up 48 percent and sales will skyrocket 61 percent.
Some analysts think it's unfair to lump Yahoo! and Google together since they have different business models.
Mark Stahlman, an analyst with Caris & Co., said that Yahoo! appears to want to be more like a traditional media company than Google. In addition to search advertising, Yahoo! also sells so-called branded advertising (i.e. graphic ads as opposed to text-based sponsored links) and content, such as music and games.
"Yahoo! is getting more than its fair share of both forms of online advertising, branded and search, and the company has done a good job of increasing their reach with new products," said Stahlman. "I wouldn't hold it against Yahoo! for not exactly being comparable to Google."
Youssef Squali, an analyst with Jefferies & Co., said that he expects Yahoo!'s search-related business to do better this year since the company has invested in new technology to improve the quality of its results.
That should improve Yahoo!'s position versus Google and make advertisers more willing to pay higher rates for sponsored links.
"I believe that 2006 should be a pretty good year for Yahoo!" Squali said. "The new search algorithm should have higher relevancy that should increase the accuracy of the searches and the monetization of the results."
They can take MSN away from Yahoo!
But Marianne Wolk, an analyst with Susquehanna Financial Group, said that 2006 will be a "transition year" for Yahoo!
MSN is not expected to re-sign with Yahoo! since it is in the process of revamping its own search technology to be more competitive with Yahoo! and Google.
It is currently testing a program called adCenter, which will allow advertisers to bid for keyword searches based on specific customer data such as age, gender and geographic location.
Wolk said several other Yahoo! partners, such as European broadband provider Wanadoo and Korean portals Naver and Daum, also have contracts that should expire this year and adds that these companies may also seek to build their own search functions. "Weakness in search could offset strength in branded advertising," she said. "There's incremental risk from the potential losses of other partners."
With that in mind, analysts are divided about whether or not Yahoo! is a good bargain. On the one hand, Yahoo! is a more expensive stock than Google on a price-to-earnings basis...albeit barely.
Google trades at 54 times 2006 earnings estimates compared to a P/E of 56 for Yahoo! Since Google went public in 2004, it has been valued at a discount to Yahoo! on a price-to-earnings basis but the gap has narrowed considerably.
But Squali points out that if you value the stocks based on earnings before interest, taxes, depreciation and amortization (a commonly used metric for looking at media companies), Google actually trades at a sizable premium to Yahoo! Google trades at 33 times his 2006 EBITDA estimates, compared to a multiple of 24 for Yahoo!
Of course, neither stock is cheap. But if Yahoo! can prove to Wall Street that Google's not the only online advertising company making waves, then 2006 could be, to quote one of the Gershwins' more famous songs, 's wonderful for Yahoo!
Yahoo! and Google are all about convergence. Click here.
For a look at more Internet stocks, click here.