You might have thought the now-infamous "Peanut Butter Manifesto" would have turned shares of Yahoo! (YHOO) into jelly.
After all, while investors have known all is not well at the Internet company, the extent of the turmoil revealed in the note was still surprising. It turns out that while CEO Terry Semel said he had a plan during the company's latest conference call to close the search gap with
and extend its leads in the fast-growing social media and mobile segments, much of Yahoo!'s own senior management was still feeling that the company lacks a vision.
So, why does Wall Street seem to have more faith in Yahoo! than Semel's own lieutenants?
Shares of the Internet company have rallied 22% to $28.15 since the company's mid-October announcement of disappointing results and a soft fourth-quarter forecast, blowing past the
in that time frame. And the public airing of Yahoo!'s dirty laundry didn't give investors a reason to pause. The stock is up 5.4% since news of the memo spread this weekend.
An analyst note released Wednesday summed up the bullish case. Yahoo! is oversold at this point, and the numerous initiatives the company has in its pipeline -- ranging from upgrading its advertising platform to announcing a deal with newspapers -- will pay off in 2007, American Technology Research analyst Rob Sanderson wrote, raising his price target from $31 to $34.
But more interestingly, investors could see upside even if the company keeps bumbling, Sanderson wrote, offering a clue as to why shares continue to be propped up even as a growing number of commentators question Yahoo!'s ability to execute.
That's because more failures -- such as additional problems with the company's already delayed Project Panama -- would likely result in big changes. "Some investors have been questioning management, as is often the case when a stock is disappointing," Sanderson wrote. "If Panama goes poorly, investors will know this in early Q2 and the recent whispers for new management will become very loud."
Yahoo! may then turn to Google to power its searches, or Yahoo! could be sold outright. Either way, investors come out ahead, Sanderson says.
Still, the richly-valued Yahoo! -- trading at 47 times forward earnings, compared to Google's 37 -- is anything but a sure bet.
First, replacing Semel is hardly the cure-all for the company Yahoo!'s problems and may well end up creating more problems than it solves. While a change at the top gets all the attention, more critical to Yahoo!'s success will be retaining the rank-and-file.
And for average Yahoo!'s, who will see setbacks coming ahead of investors, more problems will be more incentive to get out of the company. As for a partnership with Google or a possible sale of the company, those deals should be weighed on their own merits, and not be seen as an escape hatch. Yahoo! shareholders would be much better off -- and get a higher valuation -- if the company were to be acquired at a time when it had a viable independent future.
In the meantime, the company shows signs of making progress. Yahoo! search queries grew at a faster rate than that of any other major search engine, according to research released Tuesday by Nielsen Media. The company also announced a promising deal with newspaper publishers, and is making smart, low-key investments that can pay off in the long run.
Ironically, a gradual but sustained climb upward may be the only thing Wall Street does not want to see. It would lead to Yahoo! continuing to cede ground to Google, but with giving Semel a way to be in charge.