Shares of Yahoo! ( YHOO) rallied Wednesday on the heels of an
earnings announcement that was buoyed by news that the company's new ad ranking component of its highly anticipated search technology would roll out ahead of schedule. The stock was recently up $2.08, or nearly 8%, to $29.04, reversing a selloff in six consecutive trading sessions. The new Panama system, which takes into account both an ad's click-through rate and the amount an advertiser is willing to bid, mimics the system currently used by search market leader Google ( GOOG) and is intended to boost the money Yahoo! makes per search. Yahoo! management exuded confidence when talking about Panama late Tuesday, with CEO Terry Semel noting that the majority of Yahoo!'s U.S. advertiser revenue has already been transitioned to the system, and that the company will begin introducing the new system into international markets starting with Japan during the second quarter. The extra time that Yahoo! took in rolling out the new system was well worth it given its quality, CFO Sue Decker said, and the platform was put together in a way that would make future upgrades simple. Given that the system will learn which ads are more effective than others over time, Yahoo! expects the bottom line impact to grow over time.
More so than any immediate financial performance, investors in Yahoo! are now expressing renewed faith in the company's ability to deliver on its massive base of technology-oriented media assets, led by the new Panama ranking system. Despite losing almost a third of its value in 2006, Yahoo! is no value stock and trades at a hefty forward earnings multiple of 49, as compared with Google's 36. "In our view, investors are placing a bet that Panama will improve the growth of the business, not for just twelve months, but on a long-term basis," wrote Stifel Nicolaus analyst Scott Devitt in a research note on Wednesday. Stifel Nicolaus makes a market in Yahoo! shares. Panama didn't provide the only glimmer of hope, however, as Yahoo's quarter included a strong showing for display advertising, where Yahoo! remains the undisputed leader. Revenue from the top 200 U.S. advertisers was up almost 30% in the quarter, with even the financial services sector -- where Yahoo! had seen third-quarter weakness -- showing growth. Yahoo! also was upbeat about its beefed-up forays into social media, with existing properties like Yahoo! Answers and Flickr having strong showings, and recent acquisitions including Bix and MyBlogLog registering solid performances under the Yahoo! banner. Investor sentiment that help for the top line may be on its way offset the company's uninspiring revenue outlook, which called for revenue excluding traffic acquisition costs of $1.1 billion to $1.2 billion for the first quarter and $4.95 to $5.45 billion for 2007.
A Thomson Financial analyst estimate was expecting revenue of $1.26 billion for the first quarter and $5.47 billion for the full year. That forecast coincided with the report that fourth-quarter revenue rose only 15% excluding costs, after rising 36% year over year in the prior fourth quarter. But some investors took Yahoo's guidance with a grain of salt. "We believe guidance is conservative, especially on implied spending and sets up upward revisions through the year," wrote American Technology Research analyst Rob Sanderson in a note to clients on Wednesday. Sanderson, who upgraded his price target to $37, says the stock may be ready to move upward as investors see more positive signs over the horizon. "With a low bar on guidance, easy comparables and the most significant growth catalyst in years now only weeks away, we believe the stock will be a great performer in 2007."