Yahoo! Fans Lose the Faith

Investors decide to not wait for the turnaround.
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is making the expected boom in Internet ad dollars the centerpiece to its ambitious turnaround plan.

But after what promises to be another trying year for the company, even some of its longtime backers on Wall Street are now giving it no more credit than an old-fashioned media company.

Shares of Yahoo! dropped nearly 9% -- setting a new intraday 52-week low -- in afternoon trading on Wednesday after the company

issued soft guidance for the quarter ahead and announced that it would invest aggressively in the year to come. And even its seemingly impressive fourth-quarter earnings were largely due to a favorable tax rate.

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Wall Street's frustration with Yahoo! now seems to be reaching new heights. And now the crutch leaned upon by Yahoo! backers -- that despite its troubles, the company was too cheap amid the fast-growing Internet sector -- seems to have broken.

Even Wall Street analysts that backed Yahoo! until now are throwing in the towel and saying that given the tough road ahead, maybe the company should be stripped of its Internet-stock premium.

Yahoo! also said it would cut 1,000 jobs by February as it attempted to rework its game plan. Rather than make cuts across the board, the company will eliminate employees in businesses it didn't see as part of its new focus while hiring in areas it planned to grow, CEO Jerry Yang said in a conference call for investors.

Yang plans to grow Yahoo!'s already massive site traffic -- the destination is already the most visited on the Internet, with 500 million visitors from around the world each month -- to even larger levels, while cutting back on the company's other initiatives, like creating Hollywood-style content.

"We plan to take advantage of a unique window of time in the growth of the online advertising market to get ahead of the curve and capture a significant piece of the market and create value for our shareholders," Yang said. "We're not tinkering around the edges. We're making significant -- and what we believe are game-changing -- investments in Yahoo!'s future."

Yang said that the company's goal is to grow monthly visits to the company's key properties where users start on Yahoo! by 15% a year -- and to touch 20% of the total online ad demand "over the next several years."

These "key starting points" include Yahoo!'s front page, mail, search, My Yahoo! and mobile products. Yahoo! plans to invest heavily in these areas, as well as its finance, sports and news properties -- which it also sees as crucial to user appeal.

But some previous Yahoo! bulls could hardly have had a worse reaction to Yang's plan to invest more heavily in the year ahead.

"The single biggest change to our thesis is the steep investment outlook for Yahoo! announced for 2008," Citigroup analyst Mark Mahaney, who downgraded the stock from a buy to a hold wrote in a research note on Wednesday. "Investors are now faced with an approximately $300 million incremental investment with limited details."

There is also a dose of irony as Yang invests heavily in an attempt to catch even more of the migration of advertising dollars from traditional to online media. Analysts like Mahaney feel that the dip into earnings that the investment will require now legitimately means that Yahoo! should be looked at as a traditional media company.

"We believe the valuation implication of the '08 cash flow outlook is to remove the justification for the Media-premium multiple for YHOO," Mahaney wrote. "We view YHOO -- trading in the aftermarket at $19 (7.0XEV/EBITDA on our revised down '08 estimates) -- as trading in-line with trading with traditional media companies."