March 8, 2001 1:40 PM PST

Analysts: Yahoo shares remain too steep

Shares of Yahoo fell 16 percent Thursday, but analysts said the Internet portal's stock is still too expensive, considering its 2001 earnings will be substantially lower and CEO Tim Koogle is stepping aside.

After market close Wednesday and a long trading halt, the leading Web portal said revenue for the first quarter will be revised to between $170 million and $180 million. The company added that its pro forma net income will break even. That's well below the $232 million in revenue and per-share profit of 5 cents that Wall Street analysts expected, according to First Call.

To make matters worse, Koogle admitted the company can't predict earnings for the year. Chief Financial Officer Susan Decker said the company is committed to breaking even. According to First Call, Yahoo was expected to post earnings of 36 cents a share for 2001.

"Yahoo stock has declined about 40 percent since early January. Despite this, we still see downside to the low teens," said ABN AMRO analyst Arthur Newman, who has a "reduce" rating on the company. Newman said it is trading at 30 times its previously projected 2001 earnings. Now that those earnings will be substantially lower, so will the stock price.

Yahoo shares fell $3.25 to $17.69 by the 1 p.m. PST close of regular trading Thursday.

Lehman Brothers analyst Holly Becker, who has been sounding warning bells about Yahoo for months, said the company "still has a hefty valuation, a business model in transition, and very little earnings visibility."

Newman said Yahoo's gloomy news has cast a pall over all online media companies that depend on advertising.

In trading Thursday, shares of Terra Lycos closed down 75 cents to $11.75. CNET Networks, publisher of News.com, lost $1.13 to $9.44 after issuing a profit warning. Online advertising company DoubleClick lost $1.25 to $12.06. AOL Time Warner, considered to be the strongest of the bunch, lost 80 cents to $44.50.

"Sometimes if you build it, they will come, but they might leave their wallet at home," said Newman. "This seems to be the case with Yahoo.

"The company continues to increase usage minutes with little effect on net ad impressions," he added. "Specifically, Yahoo increased usage to nearly 116 million hours in January, up over 100 percent from January 2000, while decreasing net ad impressions by about 3 percent."

And it'll only get worse. Newman said dot-coms still account for a big chunk of Yahoo's top 10 advertisers.

Koogle exit just the beginning?
The news that Koogle is stepping down had Wall Street wondering what's really going on behind the scenes at Yahoo.

The company has lost four key


Gartner analyst Whit Andrews says the company's birthright as the sole must-buy Internet advertising location fueled its huge growth, but it now needs to successfully tie its business infrastructure to profit-generating systems.

see commentary

international executives, including the heads of Canadian and European operations, head of Asian properties and the chief executive of Yahoo Korea.

"We believe these departures could be the tip of the iceberg as times continue to be tight through at least the first half of 2001," Newman said.

Lehman's Becker said Yahoo's decision to look outside the company for a new CEO will be positive in the long run. The company must act more like a traditional media company, she said.

"It needs to broaden its traditional advertiser base and relationships with both clients and agencies," Becker said. "We believe that Yahoo's Internet culture has held it back from realizing its full potential."

However, Becker said Koogle's decision to step down raises questions.

"A change as drastic as this suggests that there is more here than meets the eye," she said. "We question how bad things really are inside Yahoo and how long it will take to fix them."

Analysts said Jeff Mallett, Yahoo's president and chief operating officer, could resign since he was passed over for the top spot. Management turmoil could indicate that there's more to Yahoo's problems than macroeconomic conditions.

Cutting estimates
Analysts cut their earnings targets across the board but only slightly changed ratings. Many analysts had already reduced their ratings on Yahoo.

Jeffrey Fieler, an analyst with Bear Stearns, stuck to his "buy" rating for Yahoo.

"We believe that those investors that are patient and take advantage of current share prices will be rewarded," Fieler said. "We continue to be buyers of the stock in spite of near-term earnings disappointments and the concomitant expectation that this will pressure the share price."

Nevertheless, he cut his 2001 targets. Fieler predicts Yahoo will report a loss of a penny a share in the first quarter on sales of $177 million. For 2001, Fieler cut his earnings target from 45 cents a share to a penny a share. He lowered his revenue forecast to $825 million from $1.2 billion.

WR Hambrecht analyst Derek Brown cut his estimates on Yahoo for the second time this month. He projects revenue of $791.7 million in 2001, compared with his previous estimate of $1.18 billion. Brown expects earnings per share of 5 cents a share, down from his earlier estimate of 39 cents a share. In 2002, Brown anticipates earnings of 17 cents a share on sales of $1.07 billion.

"We continue to suggest that investors remain on the sidelines until the smoke clears," he said.

 

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