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Time to Climb Out of the Penalty Box

BY James Altucher | 09/21/06 - 10:38 AM EDT
Action: YHOO

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 moment.

-- 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 opportunity.

Regards,

James Altucher

Send email to internetreview@thestreet.com

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