Wednesday, October 18, 2006

Color on quarter: Yahoo! (NASDAQ:YHOO)

Yahoo! (NASDAQ:YHOO) has yet again failed to please the analyst community with their quarterlies:

- Piper Jaffray says Yahoo is facing two important trends, both causing the company to lose market share. The first, the search monetization gap, is well understood and we believe will be narrowed next year. The second, however, is a new trend where Yahoo's share of display ad dollars is also declining, primarily because, in firm's opinion, Yahoo has not kept up with user trends. The verticalization of the web and the growth of the social networking sites have been happening over the past two years, and Yahoo may have missed earlier opportunities to react to these trends. The optimistic view would suggest that given Yahoo's wherewithal, brand and global reach, it should be able to catch up with the industry. Firm cautiously shares this view but also believes a transition period, which may require some structural changes, could be ahead. Thus, while the stock is not expensive, the multiple is likely to remain depressed as long as growth is notably lagging the industry and a successful transition is yet to happen. Given Yahoo's franchise, they still believe the company is a valuable long term holding, but they would only opportunistically accumulate the stock on pullbacks, as the firm doesn't expect major appreciation in the near term.

They are lowering their estimates significantly given the weak Q4 guidance and slower branded ad growth as Yahoo is faced with fragmented competition. These change result in 2007 revenue, EBITDA, and proforma EPS estimates coming down 7%, 11%, and 8% to
$5.43B, $2.24B, and $0.91, respectively.

- Deutsche Bank says they remain on the sidelines on shares of Yahoo! and believe shares will be range-bound at the mid-$20 levels, with valuation support likely coming in the low $20 range. They think the stock likely fades as investors further dig into weakness in display ads and search revenues, with additional growth challenges (Panama, more MySpace ad impressions) on the horizon in 2007.

In firm's opinion, the business prospects facing Yahoo! appears to be worse than expected (following 3Q results), as evidenced by slowing growth in 3Q branded ad revs (+28% Y/Y in 3Q) and substantial paid search weakness (+16% Y/Y vs. 25%-plus growth in 2Q). While the
company contends that the branded ad business represents the weakness at the company, they think that the search deceleration (ongoing into 4Q) is clearly the bigger variance to the top-line performance (offset by cost cuts to achieve the bottom-line). In fact, search growth will likely be closer to 5%-8% growth in 4Q, implying sizable market share losses. While the firm is again reducing their 4Q and 2007 forecasts, they think that several issues remain

The company's key segments are undergoing a challenging transition. Firstly its branded ad business faces pressure from lower pricing and additional inventory from the MySpaces and YouTubes of the world, hindering Yahoo!'s ability to maintain its above market growth rates in display ads. Meanwhile, search growth is decelerating, led by declining RPS (market share losses only exacerbate the search revenue slowdown). The launch of Panama v2.0, which should help address monetization, is not expected to benefit RPS until 2H 2007.

Tgt goes to $24 from $25. Maintains Hold.

Notablecalls: RBC believes YHOO shares are halfway through a bottoming phase. I agree. While DB thinks the shares will be faded, I don't think there is a trade here just yet.

No comments: