In Focus

Unscrambling Yahoo!

Putting Yahoo! through the Chicks' Dozen
by Chick Cheryl

Yaaaaaaaa Hoooooo!!! Isn't that what you yell when you're on a roller coaster ride? Well, for all you Yahoo shareholders, Chicks included, that is exactly the ride we've been taking. Following its recent slide down the track, Yahoo seems to be inching its way back up the hill. Is this a company in serious trouble or merely one that is trapped in an industry filled with uncertainty? Let's run her through the dozen and see what we can learn!

1. Buy What Ya Know  First of all, once you hear the name of this company, you're unlikely to forget it! And no, I'm not talking about that chocolate drink that comes in a bottle. Yahoo! Inc. is one of the most recognized brands associated with the Internet. I can't imagine any online user not being familiar with this company. It is a global Internet communications, commerce and media company that offers a branded network of comprehensive information communication and shopping services to 120 million individuals each month worldwide. This online navigational guide to the web caters to both household and business users.

2. Keep it Simple Sistah! (KISS)  Yahoo!'s "customizable services" are growing every day, but a partial list includes: My Yahoo!, Yahoo! Mail, Sports, Finance, News, Weather, Calendar, Address Book, Auctions, as well as several new services such as Yahoo! Pay Direct, Yahoo! Photos and Yahoo! Experts. Their next wave called the "Yahoo! Everywhere" platform, is taking them full speed into wireless. Some 47% of Yahoo's registered users carry a cell phone, and wireless Web access is increasing popularity. Consumers with internet-ready mobile phones and devices can now access Yahoo! Yellow Pages, Driving Directions, People Search, and Yahoo!'s wireless directory with search and bookmark options for Chicks on the go.

3. Industry  Its industry is technology, and its sector within that industry is Computer Services...or more specifically, the Internet. I'd say this part of the industry is in its infancy and is definitely here to stay. Its two main competitors are AOL and Microsoft. Although AOL seems to be leading in the U.S., Yahoo is definitely the leader in Europe. As stated, this is a global company whose services are available in the U.S. and in 21 countries, in 12 languages (Non US sources account for 40% of its user base and growing!) In my mind, Yahoo seems to crossover a few sectors as well. For example, obviously, it competes with ISP (internet service provider) AOL. CEO, Tim Koogle, feels Yahoo's advantage to AOL is the fact that no software is needed for access, making it the leading work-site portal (not to mention the fact that its free to the consumer!). With their "wireless" push, they will now be a part of the telecommunications industry and with their continued growth in e-commerce, they're part of the e-tailing industry.

 
4. Leader in its Field  Yahoo is definitely the leader in the "Internet portal space" field. Clearly, if the proposed merger between AOL and Time Warner goes through, Yahoo will be competing with a juggernaut. In fact, that deal left Yahoo head honchos (Tim Koogle, co-founder, Jerry Yang and President, Jeff Mallett) questioning their strategy of partnering with lots of companies instead of buying a big one. The three remain convinced that theirs is a winning strategy. Rather than trying to own everything (a la AOL and TWX) Koogle sees Yahoo as a "pure Web media play". He'll stick to offering the masses a friendly gateway to the Web. Although Yahoo arrived late to e-tailing, their growth has been astounding. Their plan was to establish an audience first... and that they have!

5. Repeat Profitability  This is one of those weird ones... not like buying a can of Coke! Essentially Yahoo is free to the consumer, I pay AOL to get myself online. Yahoo gets the bulk of their revenue from advertisers. They are creating other revenue streams as well. Take e-commerce, Yahoo! is really only a middle man in the transactions that it facilitates, whereas a company such as Amazon is a true retailer. The plus is that Yahoo doesn't need a warehouse to hold product, but collects money on every transaction. Yahoo also plans to enter more partnerships with large corporations to help them build company portals on the Yahoo site. They plan to charge a set-up fee as well as an annual fee for each network. Yahoo is also aggressively deploying its content over wireless devices like cell phones and is reviewing ways to monetize that content, through advertising and sponsorships tailored for the smaller screens.

On to THE NUMBERS! Here's the part that gets me every time... they're just so darn great! Their business model is lean and mean, and somewhat questionable given the reliance on advertising revenue (more on that later). For the following equations, I used Quarterly Report figures found at www.marketguide.com for the most recent quarter ending 9/30/00. (By the way, marketguide is my new favorite site for gathering data.)

6. Gross Margins
Yahoo's Gross Margins are a whopping 87%, far exceeding our 50% requirement!

(Sales - Cost of Goods Sold) / Sales

(295.5 - 38.6) / 295.5 = .869 = 87%

7. Net Margins
Remember, we want these above 8%, Yahoo has doubled this amount. NM = 16%

Net Income / Sales

47.7 / 295.5 = .16 = 16%

8. Cash to LTD Debt
We would like our companies to have at least as much cash as they do debt. Well, well, well, Yahoo is a cash cow having absolutely NO debt, long term or short term! Thus, the following equation is not applicable.

Cash* / Long Term Debt
*cash, including marketable securities

9. Flow Ratio
Yahoo's Flow Ratio is phenomenal, coming in at a low .20, well below our 1.25 criterion.

(Total Current Assets - Cash*) / (Total Current Liabilities - Short Term Debt)
*Cash, including Marketable Securities

(1685.0 - 1610.5) / 366.4 = 74.5
74.5 / 366.4 = .20

10. Increasing Growth
Revenues for Q 9/00 = 295.5
Revenues for Q 6/00 = 270.1

295.5 - 270.1 = 25.4
25.4 / 270.1 = .094 = 9.4% SALES INCREASE from last quarter

In its 5-year existence, Yahoo stock has increased as much as 8000%! Granted, it has found itself spiraling downward in the past few months (up a mere 2000% since 1995!). Their revenues, however, are still increasing. I compared the most recent quarter (ending 9/30/00) to the same quarter one year ago (9/30/99). Sales have increased 91%!

The decline in value has mostly been attributed to uncertainty within this fledgling industry. Growth is said to be slowing, at least in the near term. As I stated, Yahoo depends heavily on advertising dollars for its revenue. It has been estimated that the majority of their advertisers are from other internet companies. Many of the so-called "dot-com'ers" have struggled lately for their own survival, necessitating sharp pull-backs in their advertising budgets. Yahoo contends that as more and more old-economy companies embrace the internet, these companies will pick up the slack in ad revenue. This will take time. They expect advertising dollars to increasingly flow to the internet over the next five to ten years. As they expand overseas, they'll also become much less vulnerable to conditions in the US. It is estimated that overseas countries will grow much faster than the US over the next five years.

With their purchase of Broadcast.com, they've added audio and video content for live and on- demand online events. This can take many forms, from a world-wide Victoria's Secret fashion show (from which my husband is banned!) to their recent agreement with the NFL to hold live webcasts of all games. Again, Yahoo has highlighted several new ways it plans to grow revenue and expand into new business areas. As I said, they're placing particular emphasis on its new wireless services, its growing corporate services, and its already successful shopping business.

11. Strong Management and History  The company was co-developed in 1994 by Jerry Yang and David Filo while working toward their Ph.D.'s in electrical engineering at Stanford (ok, so they're kind of brainy!) They incorporated in March of '95. Only a company named Yahoo, would have a CEO named Koogle! Tim Koogle has been CEO since the company's inception and was named Chairman in 1999. At 48, he's considered the "grown up" behind the stunning success of Yahoo.(Co-founder, Jerry Yang, is a mere 31 yrs. old, the youngest man on the board of directors.) He has been described as a charismatic man, having boundless energy and a light-hearted spirit making him a fun boss. One cannot underestimate the value of that in an enterprise where twenty-somethings are the primary brainpower! His corporate goal is to become the preeminent media company of the 21st century.

12. Buy on Sale
Current Stock Price (as of 11/10/00) = 56.44
52 week high = 250.06...can you believe that?!
52 week low = 45.06
52 week average = 147.56

Could those blue lights be flashing any brighter? It's not only a sale, it's on clearance! Personally, I believe in this company. They're creative thinkers looking to the future. Never do they seem to sit on their laurels and be satisfied. With all that cash lining their pockets and not a dime of debt, I think they'll weather this storm of uncertainty and find themselves climbing to the top of the Matterhorn once again! (Just this Chick's opinion!)