The Activist Investor: Sell Yahoo!

A scary thought for Yahoo! longs is that, as much as Yahoo! has dropped, it could still have further to go. Yahoo! has stubbornly kept a higher price-to-earnings ratio than Google over the last two years, when it would not appear to be warranted. Today, Yahoo!'s forward P/E for 2009 is still 23, vs. 14 for Google, 15 for InterActive Corp (IAC Quote), 16 for Apple (AAPL Quote), and 11 for Research In Motion (RIMM Quote). If Yahoo! were to see its forward P/E contract to be in line with Google's, its share price would drop another 40% to $7.50.

Yahoo! bulls will argue that Yahoo! has $2/share in cash and that its Asian assets are worth another $3/share, so a $7.50 price target is too low. However, Yahoo! had the same amount of cash on its balance sheet in 2002, when its stock price hit its post-bubble nadir of $4.87. The current advertising market downturn likely will be longer and deeper than the one we saw in 2000-02. Those Asian assets have certainly dropped 25%-35% in the last month with the rest of the Internet sector.

Lower forward-looking guidance during next week's analysts' call could prompt more dumping of Yahoo! shares.

Nothing will change at Yahoo! until its board is revamped. Chairman Roy Bostock was unapologetic about his handling of the Microsoft negotiations when he spoke at the August shareholders' meeting. Bostock wasn't embarrassed that 33% of shareholders voted against his reelection in 2006. He should be. Over 40% voted against him in 2007 and next year he will likely break the 50% threshold. Bostock should leave now, along with other longtime directors who were hand-picked by Terry Semel and still serve.