It's the Intangibles That Make Yahoo! Worth Buying

Kind of funny, isn't it? Yahoo! (YHOO) is down more than 90% from its 52-week high. It's the largest pure-play Internet company still standing. By now, you'd assume that all the air has been deflated from the Internet economy. Yet going bullish on Yahoo! still feels like a fate-tempting risk.

But it's a risk I'm willing to take.

Yes, I know the comparables to more established media companies aren't good. Take a typical one, enterprise value -- that is, market value, adjusting for debt and cash on hand -- as a multiple of next year's revenues. By my rough calculation, the market is valuing Yahoo! at seven times a good guess for 2002 revenues. That's a lot more expensive than AOL Time Warner (AOL), which is somewhere around four times on the same scale.

The comparisons get worse when you look at the ratio of enterprise value to the traditional media-company statistic of earnings before interest, taxes, depreciation and amortization. I won't even go there.

What I'm instead going to do is talk about Yahoo!'s intangibles. Yes, I know Internet investments based on stories rather than profits has proved, in hindsight, to be awfully stupid. But I think Yahoo!'s story remains compelling, for two major reasons.

One is volume, volume, volume. Two years ago, the promise of Web advertising was its ability to deliver pinpoint demographics: Targeting a car ad at, say, only 20-something single males intending to buy an automobile within the next six months. For now, though, those thin slices of the demographic pie aren't enough to sustain a business. But Yahoo! has the capability to reach a mass audience that advertisers and marketers are willing to pay to get in front of.

Two is that it's a really useful Web site. You can argue about the need for a site devoted to pet food sales, or one featuring copies of Coca-Cola TV advertisements, but not about the need for Yahoo!. All those millions of people are going to Yahoo! each day because they're confident that it's the easiest place to find the information or tools they need. And slowly and steadily, Yahoo! improves. Occasionally I've used a different feature on Yahoo! and thought, that's great, but what would be really cool is if the company did such-and-such instead. More than once, as if reading my mind, the site has made that change within weeks.

Now, how do you translate this praise into Yahoo!'s share price? I'm not sure. But let's say, from a hard-nosed perspective, you think the company is even too expensive at the $11 or so a share it was trading at Thursday. Advertising will rebound eventually, and the company will slowly be able to translate the trust and goodwill it has developed with users into new and different revenue streams. Plus, a sale of Yahoo! to a larger media company, likely to be at a premium given the franchise the company has developed, is a floor for the stock. And in Yahoo!'s case, given its franchise, fire-sale price and new, unladen-with-baggage CEO Terry Semel, a sale is more than the academic possibility it is for now-larger media companies like AOL Time Warner, Viacom or News Corp. (NWS).

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