Some See Deja Vu in Rally at Yahoo!

One Yahoo! analyst acknowledging the mo-mo and scarcity issues is First Albany analyst Youssef Squali, who wrote in a Monday report on Yahoo!, "While the stock is expensive by most measures, it continues to benefit from the potential for upside earnings revision, from a rebound in online advertising and from the scarcity value of large, well-run Internet names."

Squali, who has a buy rating on Yahoo! and a price target of $27, affirms, using Wall Street's traditional circumspection, that investors have exceedingly high expectations for the company. The stock, he says, "may need to consolidate and grow into its valuation short term," he wrote Monday. (First Albany hasn't done banking for Yahoo!.)

Ah, Scarcity

Meanwhile, a buy-sider this week made the same point another way. Driving up Yahoo!, eBay and Amazon.com was fund managers' understanding of the scarcity of "high-quality, high-growth names that can make their numbers," says the buy-sider, who spoke on condition of anonymity. "The business side is correct," says the buy-sider, who doesn't currently own shares in those stocks. "You're not going to have a business risk there."

These assessments bear a close resemblance to what was obvious to some four years ago, when Yahoo! was trading at a split-adjusted $75 per share. The marketplace's valuation back then wasn't based on future cash flows, but rather because Wall Street didn't want to miss the Yahoo! bandwagon. "One of the things that's going on here is you have capital that's migrating out of a lot of sectors," one analyst told TheStreet.com in February 1999. "It's chasing an incredibly few number of quality shares. And what determines price is not worth, it's supply and demand. And that's why I think these stocks have always had the premium valuations that they've had."

That analyst was Merrill's Internet analyst at the time, Henry Blodget, who later came under fire for publishing positive reports on Internet stocks while disparaging them in private.