As big Internet companies line up to report first-quarter earnings, some investors are betting on a long-awaited jump in
The Sunnyvale, Calif., Internet media titan was widely overlooked last year as Wall Street swooned over rival
. Yahoo! shares eked out just a 4% gain for 2005 while Google doubled, giving Yahoo! fans hope that 2006 would bring a lucrative catch-up rally.
But so far, this year has been even rougher for Yahoo! shareholders. While Google's once-sizzling stock has struggled to a flat start to 2006, Yahoo! has plunged 20% in the wake of a mixed fourth-quarter earnings performance and growing online competition.
Now, though, Yahoo!'s plunge is causing some investors to give it a second look. Yahoo!, which is due to report first-quarter results after the market closes Tuesday, is attracting attention because the stock seems cheap while its growth prospects, though still paling next to Google's, appear strong. First-quarter sales, excluding the costs Yahoo! shares with partners, should rise 32% from a year earlier, according to Thomson Financial. Analysts expect an 11-cent-a-share profit on net revenue of $1.08 billion.
Yahoo! is the first of the large-cap Internet companies due to report results.
is set to report after the market closes Wednesday and Google Thursday.
Five Wall Street analysts have upgraded Yahoo! shares since January. Analysts have a median price target on Yahoo! of $42.65, more than $10 above its recent price. The stock also appears reasonably priced, at least compared to Google. Yahoo! at recent levels boasts an enterprise value-to-EBITDA multiple of 26.3, compared with Google's 44.1.
Yahoo! is benefiting from the same trends helping Google, such as the shift of advertising dollars online from traditional media. Web ads are growing in popularity because they allow companies to easily measure their effectiveness. More local advertising is moving online, a trend that also helps Yahoo!.
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"I would prefer to put new money in Yahoo! at $32 than Google at $420," says Mike Binger, a money manager at Thrivent Financial, which owns shares of Yahoo! and Google among its $65.4 billion in assets under management. "I think Yahoo! is a 25% EBITDA grower," he adds, referring to earnings before interest, taxes, depreciation and amortization.
The stock is even cheaper if investors consider the value of its stakes in Yahoo! Japan and Yahoo! China, according to S&P analyst Scott Kessler, who rates the shares buy. He estimates that those investments are worth $9 to $10 per share.
"The company is underappreciated by investors because of its presence in Asia," he says. "Yahoo! is really dominant in certain countries there. They are stronger in Asia than in any other continent in the world."
Another supposed advantage for Yahoo! is the time users spend on its many sites. Users stay on Yahoo! on average for 3 minutes 10 seconds, while Google searchers use the site for about one minute, according to Nielsen/NetRatings. That's a big advantage for Yahoo!, since the longer a user's online, the more ads he or she is apt to see.
"In the long run, that's hugely important," says Darren Chervitz of Jacob Asset Management, which owns Yahoo! and Google shares among its $115 million in assets. "If there is one critical thing that Google needs to do, it is to catch up with Yahoo! in terms of usage."
Yahoo! is the top Web site both in page views and unique visitors, though its growth rates are showing signs of slowing, according to an April 10 Merrill Lynch report. Merrill rates Yahoo! neutral.
"Yahoo! is well positioned to benefit from secular Internet advertising growth and shares seem poised for a small relief rally on valuation alone," Merrill analysts Justin Post and Lauren Rich Fine wrote. But the analysts say they remain "concerned" about Yahoo!'s loss in search market share, the growth in popularity of sites like MySpace.com and a slowdown in affiliate revenue growth.
To be sure, Yahoo! is facing heightened competition from Google, which is trying to lessen its dependence on search. Google recently launched a financial news Web site, Google Finance, that competes with Yahoo! Finance. Google also is looking to add new offerings in areas like health.
Meanwhile, Google also continues to increase its stranglehold on the search market at Yahoo!'s expense. comScore Networks estimates that Google's share was 42.3% in February, up 6 points from a year earlier, while Yahoo!'s fell 3.5 points to 27.6%.
Yahoo!, which entered the search business through its $1.63 billion acquisition of Overture in 2003, remains solidly ahead of the other rivals including
Yahoo! investors are awaiting improvements to its search engine that are expected to be announced later this year. The company also is considering offering premiums, like discounts on movie rentals, in an effort to get people to use the service.
"They have invested a lot in their search technology and it is likely this year going to make them more competitive in search compared with Google," says Ted Moore, an analyst with National City Private Client Group, who doesn't recommend shares of Yahoo! or Google.