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JULY 6, 2004
By Stephen Baker Yahoo: Not Enough of a Good Thing To maintain its lofty stock price, it must deliver earnings even more stellar than recent results -- while competition grows Just how great do Yahoo! (YHOO ) numbers have to be to satisfy Wall Street? Fabulous would do, in a pinch. But if the Internet giant's July 7 earnings announcement fails to beat its own guidance -- and if the outfit doesn't boost projections for the rest of the year -- the high-flying stock could run into some turbulence. The challenge facing Yahoo CEO Terry Semel is to manage rip-roaring expectations. The Internet advertising market is booming, and Yahoo, which gets some 80% of its revenue from ads, is growing right in step. Three months ago, the portal's stronger-than-expected first-quarter earnings pumped up the entire tech sector and fueled a surge in Yahoo stock, up 44% for the year. MICROSOFT'S SHADOW. That's the problem. Yahoo is trading at about $33 per share. Its price-earnings ratio, using this year's projected earnings, is a dizzying 100. And even as the Internet rebounds smartly from its crash, a triple-digit p-e still gives investors a strong twinge of dot-com déjà vu. "We think most of the growth is already in the stock," says Safa Rashtchy, analyst at Piper Jaffray & Co. He warns that unless Yahoo blows the doors off consensus expectations, "we don't think the stock will necessarily react positively." The consensus has Yahoo announcing revenues of $610 million, making for annual revenues reaching $2.5 billion -- up 54% from last year. Earnings are expected at 7 cents to 8 cents a share, in line for net earnings of $445 million this year. That would be 88% higher than 2003. To boost the stock and the rest of tech, analysts say Semel will not only have to top expectations but also revise the projections upward. How high does Yahoo have to fly? If revenue comes in above $630 million, say analysts, investors might rally to the stock. (Editor's Note: Yahoo just matched the consensus numbers. Second-quarter revenues reached $832 million, up from $321 million a year ago. But the number analysts focus on, revenues excluding traffic-acquisition costs, came in at $609 million, $1 million lower than expected. Net profit reached $112 million, or 8 cents a share. This is what analysts were looking for, but they were hoping for an upward surprise. The company announced revenue projections of $2.46 billion to $2.54 billion -- meeting the Street's expectations.) Investors are well aware that Yahoo faces growing competition. In late June, Microsoft (MSFT ) released an initial version of its new search engine, complete with a bare-bones look to compete with industry leader Google. The appearance of Microsoft's product sent a fright through Yahoo investors, and the stock fell some 10%. USER-DATA EDGE. Yet analysts insist that Microsoft still trails Google and Yahoo in search technology, and that serious competition from the software giant in the $3.3 billion search-advertising market is a year or two away. "Right now, it's still a two-horse race in sponsored search, with Google and Yahoo in front," says Scott H. Kessler, equity analyst at Standard & Poor's. Google is the other concern. Last spring, it launched a frontal attack on Yahoo with Gmail, its one-gigabyte entry into the e-mail market. This forced Yahoo to respond with a 100 free megabytes of storage on its own e-mail service. After Google's much anticipated initial public offering later this year, the search giant will have plenty of money to fund research and acquisitions for its battles with Yahoo. The portal, though, continues to boast significant advantages over Google. Yahoo has a much broader offering and data on millions of its customers. That user information should be increasingly valuable for the next generation of Internet advertising. Online pitches will be customized to the tastes, buying habits, and location of individual consumers, Yahoo says. By contrast, Google is just starting to establish ties to customers. So for now, Yahoo is sitting pretty, and analysts still support the stock. Of the 27 who cover Yahoo, 16 still rate it a buy, and 11 a hold. That's powerful backing for a stock trading as high as Yahoo's. But that backing is bound to erode if Semel delivers anything less than a boffo report on July 7. Investors, fasten your seat belts. Analysts and firms quoted in this story have no ownership interest in Yahoo stock. Affiliates of S&P did receive noninvestment-banking revenue from Yahoo in the last year.  Baker is a BusinessWeek senior writer in New York Edited by Beth Belton
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