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Old-Fashioned Values
With Yahoo's latest spurt, they're nowhere to be found
By ERIC ELLIS
December 9, 1999
Web posted at 7 a.m. Hong Kong time, 6 p.m. EDT
How much would you pay for the shares of a company that earned profits of $40 million?
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That seems like a good profit, but would you pay a price that translates to 1,690 times its earnings? And would you still pay it when you were told the world's biggest and universally respected company--General Electric--trades at a P/E ratio of only 45?
The purists might say (and do) that anyone who pays that much for a company has rocks in their head. But anyone who took their advice--first dispensed four years ago with the stock market debut of Netscape--would've missed massive gains.
The company in question is, of course, Yahoo, the search engine and website around which an investment cult has formed. Yahoo was this week admitted into the hallowed club of stocks that form the Standard & Poor 500 index. That was enough of an excuse to prompt investors and traders to pile even more into Yahoo. Just when you thought the stock couldn't go any higher in the bubble economy, it rose 25% in a day.
Put another way, that spurt added another $18 billion to Yahoo's market capitalization. At $90 billion, Yahoo is now worth more than what the well-regarded tech researchers International Data Corporation believe Asians will spend online--in the year 2004. Of course, Yahoo is a bigger story than the Asian Internet, but it's difficult to justify paying such absurd valuations for a company that made just $40.41 million on sales of $155.1 million in the last quarter, which is not much bigger than your average Hong Kong trading company.
IDC reckons U.S. e-commerce will be worth around $1 trillion in sales by 2004 as well. Can investors in Yahoo seriously contemplate that it will capture, say, 40-50% of that figure to justify today's prices? Yahoo's price today suggests it will take 1,690 years to do so. Let's not forget there are AOLs and Amazon.com's leading literally tens of thousands of e-commerce companies. And then there's Microsoft.
What are Internet analysts on these days, apart from huge profits on their own books? I saw a report the other day justifying investment in the Boston-based incubator CMGI because its holdings are worth more than $1 trillion--on the basis of prices today's traders are prepared to pay.
Yahoo's fillip was due in most part to the program trading of big and famously conservative U.S. institutions who buy the component stocks of the S&P, or the Dow, or the Russell indices. On one side of the office, their old-school analysts were probably shaking their heads at such a purchase, but on the other side there was little traders could do about it. Many institutions that sell funds to the public are required by their prospectuses to buy the S&P component stocks in the weightings they make up in the index. And at $90 billion-plus--double the value of a General Motors that produces profits in the billions--Yahoo carries a lot of weight.
The S&P entry is an extraordinary bonus to Yahoo's famously youthful founders Jerry Yang and David Filo. The two have stakes worth $7.9 billion and $8.1 billion respectively. Of course, they were already serious billionaires and the addition of another 25% to their own worth probably won't make them sleep any easier, unless of course either man wants to catch up to Bill Gates.
So when's it all going to end? The right and only answer is, who knows? I've been following Yahoo's fortunes since 1996, when people first started predicting the burst of the Internet valuation bubble. I've been wrong probably a half dozen times since and I'm not Robinson Crusoe. I remember the self-satisfied punters that shorted Yahoo 18 months ago when it was worth a mere $20 billion. Ouch!
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