Yahoo! Googles Up Some Fine Results

By Ben Elgin Yahoo has been derided for letting Google (GOOG) snatch away the search-industry's crown, but it has certainly cashed in on its rival's success. Yahoo (YHOO) on Oct. 12 announced third-quarter net profits of $253 million, nearly quadrupling its year-ago figures. Over half of Yahoo's hefty windfall came from selling roughly one-quarter of its stake in Google, obtained in a partnership over four years ago.

Factoring out its winning investment, Yahoo's performance still shone. Its $124 million in earnings met Wall Street's expectations and bested its year-ago total by 91%. Meanwhile, a thriving Internet-advertising market rocketed Yahoo's top line by 83%, to $655 million, excluding the money it pays partners to carry its online ads. Yahoo's shares immediately climbed 2% in after-hours trading, to $34.88.

Yahoo needs such momentum to sustain its lofty valuation. The 10-year-old Internet bellwether trades at 79 times projected 2005 earnings, according to Jeffries & Co. That overshadows multiples of key competitors, such as eBay (EBAY) at 73 and Google at 60. "Yahoo's stock already reflects most of its upside," says Jeffries analyst Youssef Squali, who recently downgraded the shares from buy to hold.

"COMING OF AGE." Still, Yahoo upped its guidance for the rest of the year. The portal estimates it will post between $710 million and $760 million in fourth-quarter revenues, bringing its yearly total to $2.5 billion to $2.6 billion. In the coming year, analysts estimate that Yahoo's sales will grow 30%, to $3.3 billion, with 2005 profits expected to climb 40%, to top $700 million.

Net ads continue to power Yahoo's surge. For the most recent quarter, marketing revenues jumped 110%, to $514 million. Although last year's acquisition of search company Overture Services continues to bolster year-over-year comparisons, Yahoo estimates its organic growth in online ads will approach 40% in 2004. "This medium is coming of age as a significant advertising platform," says Yahoo CEO Terry S. Semel.

Contributing to its stock's premium value, Yahoo boasts a diverse online marketing portfolio. Not only is selling ads next to search results going gangbusters but Yahoo is also doing big business with so-called "branded ads" -- multimedia ad units displayed throughout the site, which are more enticing for many traditional advertisers.

BILLION-DOLLAR BONANZA? Researcher eMarketer estimates that Yahoo accounts for 20% of the market for U.S. online ads, as well as 35% of the paid search market. Google, by contrast, is confined almost entirely to search-based advertising. Because of this and its management's proven track record, "Yahoo should have a 20% to 25% premium over Google," says Janco Partners analyst Martin Pyykkonen.

Yahoo certainly isn't done reaping the rewards from its long-expired Google partnership. With its competitor's stock up nearly 60%, to $135, since its August public offering, Yahoo's windfall could approach $1 billion. And that, remarked Yahoo CFO Susan Decker, would represent roughly half the investment Yahoo has made in filling out its own search portfolio with various acquisitions.

Semel has had much to be proud of since mid-2001, when he took charge of the money-losing portal. It's a pricey stock, but this is one Internet company that has proven money can be made online. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau

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