YHOO Earnings: The Good, The Bad, and The Ugly

Posted: January 18, 2006 in Uncategorized
I’d be a wimp if I didn’t respond to the YHOO earnings announcement — since, along with GOOG and MSN, YHOO is one of the "Big 3" that I believe is leading this online advertising revolution.
 
So, let’s start off with The Ugly.
 
Can you get worse headlines?  "Yahoo! Gets Crushed."  Yikes.
 
How about The Bad?
 
Can you get worse stock performance?  YHOO’s down around 10% this morning.
 
Is there any Good?
 
Yes.
 
YHOO’s business fundamentally performed, though it’s very difficult to figure that out reading the company’s Q4 report.
 
Terry Semel, YHOO’s CEO, mentioned a bunch of "one-time charges" and "required for future growth" stuff.  That kind of thing definitely affects results so in this case, maybe revenue and operating income growth — about 40% — might be a better indicator how the actual business is doing.
 
Most businesses would kill for 40% growth.
 
More importantly, it’s right in the middle with future and trailing P/E… and the general rule of thumb is a stock is correctly valued when its P/E is about its growth rate.
 
Amidst this morning’s carnage, some people actually see the report as a glass half-full:  RBC Capital Markets just upgraded YHOO.
 
Ultimately, though, why does it feel like a disaster this morning?
 
A couple reasons:
 
*  In comparison, YHOO really is growing top line revenues more slowly than GOOG.  Somehow this translates into YHOO not carrying its weight as a business.
 

*  Bottomline, people love expectation blow-outs.  Witness GOOG and AAPL.  Here’s a great quote from the "crushed" article:

 
     "There is nothing there that is a particular problem," says Martin Pyykonnen, an analyst with Hoefer & Arnett who rates the shares strong buy and doesn’t own them. "It’s about beating expectations and coming out ahead, and they didn’t do that."
 
 
As I like to say:  The market is always wrong in the short-run… and always right in the long-run.
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