NEW YORK (CNN/Money) -
Shares of long-suffering AOL Time Warner dropped 5 percent Tuesday after finding itself the target of a mean one-two punch.
The jab: An article in Vanity Fair that, among other things, suggested that former CEO Jerry Levin was ousted by Ted Turner and that the company still is without a concrete vision that ties together all the disparate parts.
The uppercut: Lehman Brothers analyst Holly Becker lowered her revenue estimates for the company based on her strengthening belief that AOL faces "a more sustained downturn in online advertising than most investors currently anticipate."
Given that investors aren't exactly expecting a wondrous bounty from online ads, that's saying something.
Becker originally lost enthusiasm for AOL back in February. The analyst now estimates that the AOL unit of AOL Time Warner (AOL: down $0.89 to $17.20, Research, Estimates) (parent company of this Web site, and my employer) will take in only $1.79 billion in ad revenues this year, down slightly from an earlier estimate of $1.9 billion. (To put that in perspective, a year ago Becker was estimating $4.6 billion.)
Essentially, Becker argues that the online ad slump that hit Yahoo! with a vengeance last year is only just now hitting AOL. While AOL execs are anticipating a robust second half recovery, Becker suggests that since "AOL's advertising downturn lagged the rest of the market...its recovery may as well."
Becker doesn't expect AOL's ad revenue to pick up until the second half of 2003, and anticipates only "modest" growth after that. She's especially worried about the less-than-stellar quality of AOL's ad revenue base. At the moment, she estimates that nearly 40 percent of AOL's ads are either in-house ads, ads left over from "legacy" deals originally struck in the boom years or ads stemming from "unsustainable" deals with struggling companies like WorldCom and Petplace.com.
Whether you agree with it or not, Becker's recent reports on AOL reflect the kind of critical, skeptical research that Wall Street analysts should be doing; Becker has also been a welcome critical voice on other Internet names like eBay and Amazon.
But what's Becker thinking on Yahoo?
So Becker is a standout analyst. But she seems to have one big blind spot: Yahoo! (YHOO: up $0.32 to $16.00, Research, Estimates), which she continues to promote with logic seemingly left over from the bubble days. Yep, while Becker rates AOL (currently trading at 19 times her 2002 earnings estimates) a "market perform," she considers Yahoo! (currently trading for 160 times her 2002 estimates) a "buy."
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Using what she calls a "'creative' sum-of-the-parts analysis," but which looks a lot more like wishful thinking, she argues that Yahoo! is worth $18 a share, roughly $2 more than it's trading for now. In order to get that number, she assumes Yahoo! will be able to generate decent money through "new initiatives" designed to extract money from its current cheapskate user base -- and that the company will post substantially greater ad growth in 2002 than AOL.
Sure, Yahoo! got hit first by the ad slump. But that doesn't necessarily mean it will be first to recover -- especially since a quick look at the Top 100 advertisers on Yahoo! reveals that many of them are still dot-coms and cash-strapped tech firms, some of them the very same names Becker cites as problematic for AOL. (And Yahoo!, of course, does a lot of in-house advertising as well.) And even Becker acknowledges that Yahoo!'s attempts to "monetize" its users by charging for premium services have not exactly gone swimmingly.
Still, the market seems to agree not only with Becker's take on AOL -- it's down more than 30 percent since she downgraded the stock in February -- but with her take on Yahoo! as well: the stock is actually up nearly 30 percent from when Becker upgraded it to a "buy" way back in April of 2001.
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