Analyst calls don't get much better than this.

Jordan Rohan
Head of Media Research,
Wit SoundView
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Jordan Rohan, head of media research at Wit SoundView, first downgraded Yahoo! ( YHOO) from a strong buy to a buy on Sept. 5, 2000, when the stock was trading at around $117 (he subsequently lowered his rating to "hold"). Since that time, the company's share price has steadily tumbled to the $11 range amidst a collapse in the online advertising market and a backlash against Internet companies, and Rohan has remained bearish throughout.

Even at these levels, though, Rohan doesn't see the stock as a buy. For more on why not, and what he thinks of Yahoo! as an acquisition candidate, read on.

TSC: What missteps has Yahoo! made that have led to the collapse of its stock price? And what does it need to get back on track?

Rohan: The Web got to be much less exciting, and the online advertising market has crumbled to a large degree. Yahoo! has lost significant market share to AOL ( AOL) and it appears that the company is not taking drastic measures to reduce its overhead, either. It still has over 3,000 people working at the company. While that might have been appropriate for a company that would take in a billion and a half in revenue this year, Yahoo! is going to take in less than half of that. It appears to us that Yahoo's new senior management -- Terry Semel and others -- may not be addressing the costs out of the equation quickly enough.

TSC: In light of the AOL-Time Warner merger, would you say that the decision to remain independent has hurt Yahoo! significantly? Could that be classified as Yahoo's "fatal" mistake?

Rohan: I wouldn't call it a fatal mistake. It's not necessarily the wrong thing if you've got the right size organization going after the right opportunities. I think what you have here is a bit of a bloated organization going after an opportunity that seems to be smaller every day.

No one knows if the online advertising market is actually going to even increase next year at all. If that doesn't happen, if online advertising doesn't materialize for 2002 or 2003, investors will continue to lose patience with Yahoo! It has nothing to do with whether or not the company is independent. Clearly if the company had bought cash-flow producing assets when it had such a premium valuation, then the shares would not have fallen to this degree. But shares of the resulting entity would still have lost the same amount of market capitalization.

TSC: If you had to give out an executive report card, how would you rate Terry Semel's performance so far?

Rohan: I'm not sure if we have enough information, but that in of itself that says something. He has made evolutionary changes but not revolutionary ones. I remember I had a professor in business school who talked about "frame-breaking change." That's ... very much what's needed here. If the business model continues to erode, then just trying to figure out how to monetize its audience through premium subscriptions, while a noble intention, may still not be enough.

TSC: What is the direction of the company going forward? Given Mr. Semel's experience at places like Warner Brothers, Disney (DIS) and CBS, do you envision Yahoo! becoming a full-fledged media/entertainment company, or will it remain a neutral advertising vehicle?

Rohan: Well, let me tackle that question in a slightly different way. In the long run, I'm not sure Yahoo! can charge consumers for content unless they own that content. So to answer your question then, no, I think it will continue to be largely a content aggregator and that it will attempt to pick its spots in some areas, such as music on the Web.

TSC: Can Yahoo! secure substantial revenue from such subscription-based services such as online music?

Rohan: That's too hard to tell. I honestly don't know. Investors don't know either.

TSC: Switching gears, you have been bearish on Yahoo! for about a year or so, downgrading the stock several times. For the record, what is your current rating on Yahoo!?

Rohan: Hold.

TSC: The stock has already moved lower than your previous price target, so why not upgrade now? When does it become a buy?

Rohan: Well, first of all, as you know, I was on TV on Monday morning and the stock was at 14, so the stock has dropped almost three points in three days. And I can't be worried about one or two-day moves -- I have to talk about big trends here.

Second, clearly there is some risk to 2002 consensus estimates and to my financial estimates for 2002. Until I feel like the numbers have stopped going down, I can't even think about upgrading it. And you know what? It's not just me. It's all analysts covering all stocks in this type of economy. You can try to be a hero but it most likely makes you look stupid.

TSC: When does it become a takeover target, if at all? Under $10?

Rohan: I think it would be as soon as the estimates stop going down. I know that's strange, but there's a feeling of catching the falling knife here. I know a number of players would step up somewhere near the $10, $11, or $12 range. But only if the economic forecast that was used to come up with that target justified that now, or if that economic forecast was actually accurate.

If next year we're looking at $600 million in revenue and not $850 million, that's a very different picture. But it's possible. I think there's a fear that even at $10, you're talking about a company that net of cash still has $5 billion enterprise value and if the revenue stream continues to erode it is hard to justify that. Basically, the natural human tendency is to wait for it to stop getting cheaper. If you go to the store and they say it's 10% off today but tomorrow it's going to be 20% off, you're not going to buy anything.

TSC: Why do you think so many other analysts have missed the boat on Yahoo!?

Rohan: Well, I can tell you a few things. First, I speak to some of the company's largest advertisers so I understand what's going with ad sales and that helps a lot -- it gives me real clarity. Second, I cover media companies broadly. I don't cover a bunch of equally-inflated Internet companies. I also cover Viacom ( VIA), Disney, Comcast ( CMCSK), Charter Communications ( CHTR), and AOL Time Warner. I was one of the first analysts to put Yahoo! within a relevant set of comps, so on that basis, it has always seemed expensive to me.

Third, I think I've had a bit of a better macro call on online advertising. And I also talk to customers and industry sources -- they're my only guides. Customers don't lie; they may embellish but they don't lie.

TSC: Any final thoughts?

Rohan: The problems with online advertising predated the economic slowdown, and it's possible they are going to continue past the economic upturn as well. It has a lot to do with the format. If advertisers continue to question the very efficacy of online advertising, then online advertising is going to lose share to other media. We'll see -- it's always important for investors not to buy stocks until they stop going down.

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