Yahoo! is the leading navigational guide to the Internet, and it's not by accident that the company attracts over 38 million unique users (and growing) each month. The company as a whole trails only America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> in terms of visited Web space. Simply put, Yahoo! has one of the best online portals and has set the standard for searching the Web. Because of its attractiveness to Web surfers, Yahoo! has created for itself some valuable virtual real estate.
This real estate has allowed the company to benefit from the increasing returns phenomenon. Meaning, the more users swing by the site, the greater the attractiveness of Yahoo!'s real estate to e-commerce merchants, advertisers, and content providers. The wider the content and shopping options mean that Yahoo! becomes even more attractive to existing and new users. The online portal business is one where the strong, like Yahoo!, should get stronger.
Moreover, Yahoo! only creates minimal amounts of its own content, taking a great deal of cost out of the model. The lion's share of its content it gets on the cheap from content providers looking for links back to their own sites. By aggregating content rather than creating its own, Yahoo! allows users to access the best content the Web has to offer -- all at one easily navigable site. Not creating content, again, keeps the cost structure of the company down and is one of the reasons Yahoo! has been profitable for some time now.
While many may not see the company this way, Yahoo! is a major player in the consumer e-commerce industry. Yahoo! doesn't actually sell any goods and services to its users. Rather, it is just a matchmaker that takes a small cut of each transaction. Online matchmakers like Yahoo! and eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> have some quite attractive financial attributes since matchmakers don't carry inventory, don't have to worry about fulfilling orders, and often get paid quickly. Royalties and referral fees are the almost ideal revenue source since the variable costs to achieve these revenue sources are essentially nil.
Actually, the entire operating model of Yahoo! is pretty sweet. First, the margins at the company are in the upper tier, normally near 90% gross and 20% net. Second, the company is extremely "lightweight" with a relatively small proportion of its assets tied up in bricks-and-mortar infrastructure. Combine the high margins with assets that turn over very quickly and you have a company that can create a great deal of value from its invested capital.
In addition, the company is extremely easy to scale. The cost to adding incremental content and users is quite small. Perhaps add a few more computers here, hire a few more programmers there, and that's all that is really needed to effectively scale the business to double or triple its current size. And unlike other Internet firms, Yahoo! doesn't have to burn its cash on marketing since its brand name is already so well known.
One doesn't have to take a leap of faith to see Yahoo!'s model succeeding since the company has a solid history of profitability already to its name. Of greater importance, I think that substantial earnings growth is in the cards for the company. Top-line growth is healthy and margins are expanding -- a textbook way to grow profits. Take a look at the snapshot of the most recent results just to see how vibrantly Yahoo! is growing while also increasing its margins across the board.
(millions) Q3 1999 Q3 1998 Net Revenue $155.1 $66.3 Gross Profit $128.9 $52.5 Income From Operations $25.6 $3.1 Net Income $14.9* $4.2 Gross Margin 83.1% 79.2% Operation Margin 16.5% 4.7% Net Margin 9.6%* 6.3%*Includes one-time charges related to mergers
Yahoo! also has as clean a balance sheet as they come. Long-term debt? Fahgetaboutit. It's got none. Cash? The company has $790.5 million of the stuff and growing. If for whatever reason Yahoo! needs more ammunition (for an acquisition, for example), the stock market has also made Yahoo!'s shares quite valuable currency.
I'm sure my buddy Rick will make a great ruckus about Yahoo!'s lofty stock valuation in his initial argument. Allow me to stop him at the pass and point out that a strong performing stock is an asset, not a liability. Not only does the company have the power to easily acquire other firms that fit its vision, but the company can also raise cash with minimal dilution to current shareholders.
Yahoo! is not cheap by any means, but the old saying "You get what you pay for" applies. Yahoo! is simply an awesome company and deserves to be on the short list of proven Internet companies to consider for investment.
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