conference call Wednesday, there were lots of Wall Streetanalysts shouting yippee over the fourth quarter's strong top-line growthand impressive cost control.
But even if these trends continue through 2002, the stock still will bewildly overpriced, and thus likely to plunge if disappointments occur.
Yahoo!'s valuation -- it trades at a scary 200 times its 2002 earningsforecast of 9 cents per share -- remains one of the most baffling phenomenain the market today. Its persistence shows either that investors believeYahoo! will be bought by a company that, for some reason, won't care aboutits minuscule profitability -- or that a gigantic profit recovery awaits.
In recessionary times, most companies aren't eager to take on greaterprofits burdens than they already have. So, like the drunks of Pamplona, let's run with the bulls and follow the second option. First, the strength of the fourth-quarter revenue suggests that first-quarter 2002 sales will be better than the current analyst forecast of $164 million. Let's say they'll be $175million. Fourth-quarter revenues soared 14% from the preceding quarter. If,through 2002, we plan for revenue to increase 14% sequentially eachquarter, the company would have total revenue of $862 million this year.Yahoo!'s current forecast is $750 million to $800 million.
Then, assume that pro forma costs come in at $170 million in the firstquarter and rise only 2% sequentially in quarters thereafter. That'd putcosts at $700 million this year, producing an operating profit of $162million. After investment income and taxes, the company would make a proforma profit of $130 million, or 22 cents a share -- more than double theconsensus forecast.
That's a back-of-the-envelope best-case scenario. And yet even if allthat came to pass, and the stock improbably remained exactly where it wasWednesday (it would most probably rise if growth kicked in that way),Yahoo! would still be trading at more than 80 times its 2002 earningsforecast. That's more than three times as pricey as an already richmarketwide multiple (roughly 22 on the
at last count).
But, the bulls will say, shouldn't investors pay high multiples for high growers? Sure, but that sort of best-case growth is almost impossible to sustain for any period of time. And the chances of this Panglossian forecast happening even this year are low. For instance, the company CFO said first- and second-quarter revenue would face seasonal head winds. That means revenue likely won't grow 14% from thefirst to the second quarter. As a result, Yahoo! must increase revenueeven more than 14% in the latter part of the year to get to above $800million at year-end. That means
has to go right for thecompany.
Now, let's look at a more likely, if still optimistic, case. To get tothe upper end of its own revenue target -- $800 million -- Yahoo! wouldhave to increase revenue by a less gaudy 9% per quarter (again using a $175million revenue target for the first quarter). If you apply the fourthquarter's net margin of 9% to that, you get a per-share profit of 13 cents,which is better than the forecast. But still, that puts the stock on a 138price-to-earnings ratio.
The stock's up in after-hours trading. The mystery -- and the insanity -- continues.
Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to
In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.