Gut Check: Many Managers Get Their Yahoo! Out of Their Funds

As far as Internet companies go, Yahoo!(YHOO) appears to be the rare bird that has it all.

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Real profits, continued growth, a huge customer base, a clean financial statement and a dominant role in its sphere. The one thing it doesn't have, however, is a big group of fund managers who believe the Internet portal company's still-lofty stock valuation is justified.

Even though Yahoo! has 166 million registered users and is one of the most recognizable brand names around the globe, fund managers and analysts told this week's Gut Check they're cautious about the stock due to the market's mauling of dot-coms and the weakening online advertising climate. Nor do they expect stellar news from the company when it announces its fourth-quarter results this Wednesday.

The Yahoo! File

Business: Internet portal

1999 Revenue: $589 million

1999 Earnings Per Share: $0.24

Estimated 2000 Earnings Per Share: $0.48

Stock Snapshot

Current P/E: 66.8 Stock Price: $27.38

52-Week Range: $225.63-$25.06

Percentage Change from 52-Week High: -88%

Shares Outstanding: 558.4 million

Source: Bear Stearns, Morningstar, Zacks

That doesn't mean they don't still have faith in the long-term prospects for Yahoo! It's just that they don't believe that the stock is poised for a rebound anytime soon. Merrill Lynch analyst Henry Blodget issued a report last week saying Yahoo!'s fourth-quarter revenue are likely to meet the consensus revenue target of $316 million only barely and that the company is likely to cut estimates for the first quarter and beyond. Further, he forecasts 2001 earnings per share in the range of 50 to 55 cents, 5 to 10 cents below consensus.

Fund skippers' primary concern over Yahoo! is its valuation. While the stock opened today at $27.38, down 89% from its 52-week high of $225.63, its price-to-earnings ratio is 66.8, which is still awfully high, fund managers say. By comparison, the average P/E of other Internet companies is 45.8; in the S&P 500, the average is 23.8, according to Zacks. "P/Es could continue to compress until they meet long-term growth rates," says Akber Zaidi, portfolio manager of the (SJPPX)StockJungle.com Pure Play Internet fund, a sector fund that has about 4% of its assets in Yahoo!

Gut Check on Yahoo!
Pros	Cons
Yahoo! has 166 million registered users around the world out of a total 300 million Internet surfers.	Yahoo! doesn't receive any subscription fees from this massive user base and may alienate some of them if it begins charging fees.
Yahoo! has beaten consensus earnings per share for the past 18 quarters.	The whisper number floating around Wall Street is that Yahoo! won't meet its projected $350 million for the fourth quarter and will come in considerably lower at $296 million.
The Internet still promises to become an even richer medium with greater personalization and video streaming.	Greater personalization and video streaming are not yet a reality, and it isn't a given that Yahoo! will successfully capitalize when it is.
Yahoo! is expanding its revenue base to include fees and cobranding revenue.	Yahoo! is still reliant on online advertisements, which are very soft right now.
Source: InterBrand, Merrill Lynch

First Call/Thomson Financial estimates that for fiscal 2000 ending Dec. 31 Yahoo!'s earnings will rise 96%, but for 2001, earnings will only rise 19%.

The second big quandary fund managers have with Yahoo! is the anticipated slowdown in online advertising and the weakened economy. Yahoo! derives 90% of its revenue from online advertising and the rest from rental and transaction fees. Rob Zidar, portfolio manager of the (MANTX)Merrill Lynch Internet Strategies fund, sold off a position representing 2.37% of the fund's total assets in October for this reason. Citing the same concerns, Bob Grandhi, portfolio manager of the (MFTIX)Monument Digital Technology fund said he recently sold out of a position representing 3.32% of the fund's assets. Both currently own no Yahoo! stock.

"We are concerned about the advertising market and the slowdown in the economy," Zidar says. The consolidation of Internet companies and the Fed rate cut last week might lift online ad revenues somewhat, Zidar says. But advertising revenue remains a concern because, "If the economy is weak, then all bets are off," he says.

"Yahoo! is a very solid company that's built a worldwide brand name and franchise that's built to last," agrees Grandhi. "But we are concerned about Yahoo! and other Internet companies that are dependent on advertising revenue."

Ya-Who? Tech funds have fled from Yahoo! since the beginning of 2000
Date:	Number of Domestic Tech Funds Owning Yahoo!	Percent of Domestic Tech Funds Owning Yahoo!
Jan. 1, 2000	30 out of 56	53.6%
Nov. 30, 2000	42 out of 120	35%%
Source: Morningstar

Yahoo!'s announcement last week that it would begin charging listing fees for its auction services was met, on one hand, with praise for revenue diversification. On the other hand, there was caution that it is a sign of more fees to come. One of the biggest attractions for Yahoo! users is that they can get so much at the site -- chat, information, shopping, email, voice mails and instant messaging -- for free, analysts say.

"Yahoo! has a loyal following because of its free content model," says Gene Alvarez, program director of the electronic business strategy group at Meta Group. "By introducing fees, they might lose some of their membership base, and if they reduce that base, it would impact advertising revenue. And yet -- investors are looking for Yahoo! to diversify revenue, so it's a Catch-22," Alvarez says.

John Faig, an analyst on the (INIDX)AXP Growth fund from American Express Financial Advisors believes fees might alienate Yahoo! users. He also says Yahoo! would have been wiser to introduce fees during the Internet hysteria of last year.

Goldman Sachs issued a report this morning disagreeing with disapproval over the introduction of fees. In fact, Goldman, which has done underwriting for Yahoo!, applauds "the introduction of additional pay services as catalysts over the coming quarters."

Many analysts more bullish on Yahoo! also point to optimistic ad revenue projections for Yahoo! and other Internet companies. Internet advertising rose 65% in 2000 to $3.2 billon and will rise another 60% this year to $5.1 billion, predicts Robert Coen, a senior vice president at Universal McCann whose annual ad revenue forecasts are highly regarded in the advertising industry.

"The amounts spent to place banner ads on the Internet will probably rise sharply again as the largest marketers continue to experiment and expand their online presence," Coen predicts.

Broadband and compression technologies are allowing Internet sites like Yahoo! to marry video, sound and, soon, animated and holographic images, and portend a bright future for Yahoo!, according to a First Albany report issued last week. Yahoo! already offers streaming video on financial news, says Jonathan Hodson-Walker, a senior vice president with First Albany.

Yahoo! also "has a large database of all its users, which is very important information," Hodson-Walker says, adding that Yahoo! has said it can segregate its 166 million users into groups as small as 17,000. "There is no getting away from the Internet as a communications medium. It's more personalized and relevant than any other medium," Hodson-Walker says.

Streaming video and wireless applications are two of the main reasons Bear Stearns expects Yahoo! to return to the $160 range in the next 12 months and to continue to outperform the S&P 500 over the next decade, says Jeff Fieler, a consumer Internet analyst with the firm. In a recent Internet report, Bear Stearns analysts went so far as to say, "Yahoo! is positioning itself at the epicenter of a multidevice world as the data resource to those devices: mobile phones and personal digital assistants," as well as to the future marriage of PCs and phones through telephony. (Bear Stearns has not done any underwriting for Yahoo!.)

Scott Kessler, an Internet analyst with Standard & Poor's, says future predictions may all be well and good, but what matters right now for the direction of the stock is the online advertising climate. Until that changes, he will continue to rate Yahoo! a hold.

"You can't conjure revenue out of thin air. It's going to be increasingly difficult for Yahoo! to meet estimates if this market doesn't turn around," Kessler says.

Goldman agrees that even though the market has already priced "modestly lowered 2001 guidance into [Yahoo!] shares in recent weeks," earnings figures on Wednesday could cause "additional weakness this week."

Wild About Yahoo! These funds have made big commitments to Yahoo!
Fund	Total % of Fund	Date of Portfolio
(PNETX)Potomac Internet Plus	9.07	Sept. 30
(IINTX)Investec internet.com Index	6.17	Oct. 31
(TTOPX)Turner Top 20 Institutional	5.03	June 30
(TGMCX)TCW Galileo Aggressive Growth Equity	4.58	June 30
(SJPPX)StockJungle.com Pure Play Internet	4.08	Sept. 30
Source: Morningstar

They Don't Want to Yahoo! These funds have sold big stakes in Yahoo! in recent months
Fund	Shares Sold	Date of Portfolio
(JAVLX)Janus Twenty	1,112,000	Oct. 31
(MNNAX)Munder NetNet	309,000	Nov. 30
(IFOBX)MSDW Information	300,000	Sept. 30
(TRBCX)T. Rowe Price Blue Chip Growth	210,000	Sept. 30
(INIDX)AXP Growth	200,000	Nov.30
Source: Morningstar

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