An Old Net Champ Could Come Back Big
(MONEY Magazine) – WHEN GOOGLE'S STOCK HIT an all-time high this fall after the company announced that it was buying online video site YouTube for $1.65 billion, it seemed to be ushering in a new round of dotcom-mania. But conspicuously absent from the party were former Wall Street Internet darlings Yahoo (ticker symbol: YHOO), eBay (EBAY) and Amazon.com (AMZN). Yahoo, in fact, has plunged 33% this year, while Amazon and eBay are each down more than 20%. All have stumbled on concerns about slowing growth and competition from Google, which has added services like online payment and comparison shopping to its core search business.
The question is, which, if any, of these stocks has the potential to rebound? To many analysts, Yahoo is the clear winner.
"Yahoo has the best business model, since it's driven by online advertising. As long as there is no economic hard landing, the company's in good shape," says Martin Pyykkonen, an analyst with Global Crown Capital (for reasons the economy will stay strong, see page 104). Yahoo is still No. 2 in the search business, and it recently unveiled a new search service that analysts think will help it regain ground it has lost to Google. The company's sales are expected to increase 23% this year and another 20% in 2007. Amazon's future earning power, on the other hand, is less clear, since it is in the much more competitive and low-profit-margin business of retailing, says Pyykkonen. As for eBay, analysts aren't sure whether new products like Internet calling service Skype will offset slowing growth in its auction business. By contrast, Yahoo is strong in areas such as social networking and photo sharing, in which Google isn't as successful, notes portfolio manager Mark Oelschlager of Oak Associates, who recently added to his Yahoo stake (Oelschlager also owns eBay, Amazon and Google). And the stock looks cheap relative to Yahoo's long-term potential. It trades at a discount to the S&P 500 when you consider its PEG ratio, which measures a company's price/earnings ratio against its expected earnings growth rate for the next five years. According to the most recent filings, Bill Miller bought more Yahoo for his Legg Mason Value Trust fund in the second quarter, and MONEY 65 fund Fidelity Value took a new position of more than a million shares.
Behind the Headlines
THIS MONTH: Why Google isn't the only Internet stock with upside...Growth? Value? Who cares?
These three stocks sank as Google soared.
YTD PRICE CHANGE
NOTE: As of Nov. 3.