April 12, 2001 9:40 AM PDT

Yahoo: For better or for worse?

After Yahoo reported its first-quarter earnings and gave a murky outlook for 2001, Wall Street on Thursday was busy pondering whether the worst was over for the leading Web portal and its downtrodden shares.

The question is a big one following a report last week from Lehman Brothers analyst Holly Becker. She said that despite worries about leadership, online advertising and a business model in transition, things couldn't get much worse for Yahoo. After all, Yahoo shares are trading near $15, well below a 52-week high of $173.

If an informal poll of Wall Street analysts is any indicator, Becker won't have much company on her Yahoo bandwagon. The consensus view: "The worst is over? What was Becker thinking?"

Most Wall Street analysts were certain that Yahoo's stock, as well as its business fundamentals, still haven't seen a bottom.

On Wednesday, Yahoo reported first-quarter earnings that just beat Wall Street's expectations and said it plans to lay off 12 percent of its employees. It also gave its outlook for 2001, along with many mixed signals. Questions still abound about who the company's new chief executive will be, what the online-advertising market will come to, and how much Yahoo can diversify its revenue stream.

Becker is sticking to her guns. She reiterated that she thinks Yahoo shares will rebound following the company's earnings.

"We remain convinced that the worst is over for Yahoo, as we had articulated when we upgraded the stock on April 5. Yesterday's results underpin our belief that estimates have come down far enough and that (Yahoo's) brand, traffic and consumer metrics are as strong as ever," the influential Internet analyst wrote in a note that reiterated her "buy" rating.

Most analysts disagreed. Asked whether the worst was over for Yahoo, here's what some other analysts had to say:

 "No," said Jeffries' Frederick W. Moran. "There's obvious evidence that this company's operations and fundamentals haven't hit bottom yet."

Moran said he feels Yahoo's management confirmed that assessment by saying that next quarter will be flat. "To say we have seen a bottom fundamentally has no support--a bottom on the stock is a whole other argument," he added.

Though Moran said the stock could be close to a bottom, he expects it to trade sideways for a while. "There's no rush to buy the stock. In fact, investors should stay away," he said.

 "No, I don't think so," said CIBC World Markets' John Corcoran. "It's premature to say that this is the weakest quarter," especially taking a historical perspective and comparing figures to what had been expected. That's particularly true of "advertising revenue, (which) was down 50 percent sequentially, (and) average revenue per average advertising client, (which) was down 44 percent sequentially," Corcoran said.

The analyst listed a host of signs that the worst is far from over: The company is still looking for a CEO, morale is becoming an issue, options are under water, defections are increasing, and revenue diversification plans may take longer than expected to yield fruit.

 "No, not yet," said William & Blair's Abhishek Gami. Not only are its fundamentals far from bottom, "this could be a single-digit stock," Gami said.

The analyst gave two reasons that the company needs some time to bottom out: It has a long way to go in its effort to shift its revenue model from advertising, and it still hasn't given clear clues on future quarters.

The psychological effect of the layoffs may be a bigger blow to the company than most anticipate, Gami added. "This kind of personnel issue can really eat away at a company from inside." The turnover in top management is likely to exacerbate the issue, he added.

 Deutsche Banc Alex Brown's Andrea Williams Rice gave a more moderate response. "It could always get worse, but my sense is we're close to the bottom," she said.

But "Is the worst over?" is only one of two questions analysts say investors should be asking following the Yahoo report. "The second key question is, 'When do we start to see a pick up?'" Rice said.

At worst, the company's second quarter would be its nadir. "We could tread water here for a while," she added.

 

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