Haven't we been here before?

SoundView Technology analyst Jordan Rohan raised his target on Yahoo! ( YHOO) Monday to a stock price implying a price-to-earnings ratio of 100.

Though Rohan, in his Monday report, defends his upgrade as boldfaced-and-underlined "very thoroughly considered," the move is inevitably reminiscent of pre-bubble-bursting analysis of Yahoo!, which peaked at a split-adjusted $250 at the turn of the millennium, having enjoyed triple-digit-P/E price targets most of the way up.

The move comes amid a spring rally that has driven up prices across the stock market, particularly among once-hot names in the tech sector. Shares in Yahoo! rose $1.68 Monday to trade at $30.40. Yahoo!'s stock was trading below $10 in early October.

Low-Ball

In part, the 100 P/E ratio -- based on Rohan's new $35 price target and the 35-cent Thomson First Call earnings-per-share estimate for 2003 -- reflects low-ball guidance issued by Yahoo! and accepted by sell-side analysts, says one buy-sider who follows the company.

"It's the same thing that Yahoo! did four or five years ago," says the buy-sider, who bought the company's shares at $10, sold at $15, and spoke on condition of anonymity. "If you're an expensive stock, there's no reason to put out realistic, accurate estimates. ... You own these stocks because of momentum, and the fact they're going to beat estimates."

Yahoo! also announced progress on a previously announced relationship with the U.K.'s BT Group ( BTY). Yahoo!'s announcement with BT Group today follows on the model of a similar deal it has with telco SBC Communications ( SBC) to offer a co-branded high-speed Internet access service in the U.S. Under the direction of CEO Terry Semel, Yahoo! has sought to diversify its revenue beyond the dot-com advertising that fueled its original boom.

Mind the Gap

Rohan's estimates for Yahoo! are indeed higher than consensus, but that difference doesn't exactly close the gap between the Yahoo!'s valuation and the S&P 500's P/E ratio of around 19, based on 2003 estimates. Rohan -- who raised his rating on Yahoo! from neutral to outperform, and upped the price target from a prior $25 -- estimates the Internet bellwether will earn 39 cents this year and 57 cents in 2004, above the 46-cent consensus. Based on Rohan's 39-cent estimate, a $35-per-share Yahoo! would be trading at a mere 89.7 times earnings.


Stepping Up
Yahoo!'s revival


In his report, Rohan cites several factors for raising his rating: the margin of upside to Yahoo!'s estimates that is greater than others predict, acceleration of growth of core ad revenues, potential boosts to his own raised estimates, and the expectation that investors will soon focus on Yahoo!'s 2005 figures and the growth he expects them to reflect. SoundView hans't done any underwriting for Yahoo!.

But the buy-sider isn't buying today. While Yahoo!'s risk profile is "much, much less" than it was in the late-1990s run-up, says the investor, "there are still risks in owning a stock at 100 times earnings."