For Yahoo! (YHOO) and other Internet stocks, it's flashback time.
Accompanying Yahoo!'s steady operational improvement, shares in the Internet bellwether have nearly quadrupled since last fall, echoing the Net stock boom of the late 1990s and putting investors in an optimistic mood for the company's second-quarter earnings announcement, which is due after the market's close Wednesday.
But with Yahoo!'s shares setting new 52-week highs on a near daily basis, investors have to wonder whether Yahoo!'s,
and other stocks' remarkable recent performance reflects any increase in fundamental value.
In fact, it's plausible that what's driving this rally are the same things that drove it back in 1999: A finite number of Internet shares in which Wall Street can invest, and a hunger for momentum, both of which trump rational caution about price-earnings ratios that look headed off the charts.
Thus, while Yahoo!'s progress could be regarded as a sign that the economy is indeed recovering -- a larger issue we at
hope to address through our new
portfolio, of which Yahoo! is a component -- Yahoo!'s great leap upward could just as easily be interpreted by skeptics as signs of a retro-bubble market.
Shares in Yahoo!, which bottomed out at $8.94 last September, fell 17 cents to close at $35.10 on Tuesday.
That gives Yahoo! a price-to-earnings ratio, based on the Thomson First Call consensus for 2003, of 100. Meanwhile, eBay is trading at 78 times earnings,
is at 84 times, and the
index is at 19 times.
These levels are hardly scaring off analysts. Prudential's Mark Rowen, for example, late last month raised his price target on eBay to $120, or 82 times consensus.
For the record, analysts are expecting Yahoo! to report $316.6 million in revenue for the second quarter ended June 30, and earnings per share of 8 cents. For the year, the current expectation is $1.28 billion in revenue and 35 cents of EPS.
One Yahoo! analyst acknowledging the mo-mo and scarcity issues is First Albany analyst Youssef Squali, who wrote in a Monday report on Yahoo!, "While the stock is expensive by most measures, it continues to benefit from the potential for upside earnings revision, from a rebound in online advertising and from the scarcity value of large, well-run Internet names."
Squali, who has a buy rating on Yahoo! and a price target of $27, affirms, using Wall Street's traditional circumspection, that investors have exceedingly high expectations for the company. The stock, he says, "may need to consolidate and grow into its valuation short term," he wrote Monday. (First Albany hasn't done banking for Yahoo!.)
Meanwhile, a buy-sider this week made the same point another way. Driving up Yahoo!, eBay and Amazon.com was fund managers' understanding of the scarcity of "high-quality, high-growth names that can make their numbers," says the buy-sider, who spoke on condition of anonymity. "The business side is correct," says the buy-sider, who doesn't currently own shares in those stocks. "You're not going to have a business risk there."
These assessments bear a close resemblance to what was obvious to some four years ago, when Yahoo! was trading at a split-adjusted $75 per share. The marketplace's valuation back then wasn't based on future cash flows, but rather because Wall Street didn't want to miss the Yahoo! bandwagon. "One of the things that's going on here is you have capital that's migrating out of a lot of sectors,"
one analyst told
in February 1999. "It's chasing an incredibly few number of quality shares. And what determines price is not worth, it's supply and demand. And that's why I think these stocks have always had the premium valuations that they've had."
That analyst was Merrill's Internet analyst at the time, Henry Blodget, who later came under fire for publishing positive reports on Internet stocks while disparaging them in private.