Yahoo! (YHOO:Nasdaq) went into the penalty box earlier
this week when the company stated at the Goldman Sachs
conference that earnings in the third quarter would be at
the lower end of the range because of a slowdown in
financial services and auto services advertising. I'm not
taking any action in this Alert, but I have a couple of
thoughts on this development, some good, some bad.
First off, Yahoo! shares are a strong buy right here.
Obviously, I've been thinking that for a while, and have
been wrong in the past, but here the bad news is out.
Plus, there are a lot of good things happening in the
company's business that have been ignored.
-- Panama, the new version of Yahoo's ad-serving
technology, will provide a nice boost to earnings. Right
now the big players, like the automakers, are a driving
force in ad revenue. Although that won't change anytime
soon, the addition of Panama opens up Yahoo's entire ad
network to small businesses everywhere in a very
meaningful way. I've recently been advising some companies
on how to use Google's (GOOG:Nasdaq) ad network, and at
times its system can be very frustrating. Once Yahoo's
technology is on a meaningful par with Google, small
businesses will flock there.
-- We haven't yet seen results from Yahoo's purchases of
Flickr (a photo-sharing Web site) and del.icio.us (a site
that enables users to share links to their favorite Web
sites) because they've been small. I highly recommend you
try out those Web sites because they show the direction
the Web is heading in. When I want to find useful links, I
go to del.icio.us before I go to Google or even Yahoo!.
And I upload my family photos on Flickr. I expect these
recent acquisitions to pay off longer term.
-- I think that part of the slowdown in Yahoo!'s financial
services segment comes from the lack of oomph in its redo
of its Yahoo! Finance message boards. Yahoo! Finance as a
stand-alone site is one of the largest traffic centers on
the Internet, and the message boards are the driving force
of that. I commend Yahoo! for the improvements, but I
believe the adjustment is hurting its ad sales at the
-- Now, for something much bigger: There are news reports
out today that Yahoo! is in talks with Facebook, a social
networking site that taps into the college student market.
If Yahoo! buys Facebook, I believe it is game over in
the social-networking space for anyone except MySpace and
News Corp. (NWS:NYSE). That said, Facebook has a much more
appealing demographic for advertisers. That would be a
huge boost to Yahoo!, and a very easy integration could
happen between the two companies ¿- a possibility that I'm
excited about. Facebook alone could take Yahoo! shares
back to $40. The stock was recently trading at $25.81.
Note also that Safa Rashtchy, an analyst at Piper Jaffray,
wrote in a research note that the slowdown in auto
advertising reported by Yahoo! appears to be primarily a
seasonal effect, and that a pickup in this area is likely
in the fourth quarter and first half of 2007. Piper
Jaffray maintained its outperform rating on the stock,
saying that the recent selloff creates a buying
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These four Internet companies are all undervalued and have strong prospects.
This portfolio company made a wise acquisition this morning.
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