By Paul Larson (TMF Parlay)

(Dec. 1, 1999) -- Rick went right where I thought he was going to go -- valuation. You're not going to pin me into the "valuation doesn't count" corner, but I will say that my experiences as an investor tell me that business quality matters much more than the stock price on any given day. Even Rick, our curmudgeonly but friendly bear, agrees with me that Yahoo! is one sharp organization.

Is buying a stock at 300x forward earnings estimates insane? Maybe, but it is worth noting that these seemingly high P/Es will contract in a hurry when the company's earnings continue to grow. Plug in a 40% earnings growth rate, ridiculously modest for Yahoo!'s prospects, for just a few years and see how that $0.67 in expected earnings explodes. It's also worth noting that the company has beaten the published estimates by at least 30% over the past five quarters, and I think more upside surprises are ahead.

I always chuckle a little when I hear the "growth is slowing!" arguments against such vibrantly expanding companies. Did anyone really think that 100-200% annual growth rates were sustainable for more than a few years at most? The law of large numbers tells us that just about every single company will eventually see its growth slow, some sooner than others. Yes, Yahoo!'s growth is slowing, but I think most companies would kill for the sustainable expansion rate Yahoo! will likely settle at.

To be concise, I think Yahoo! is one of the Rule Makers of the Internet. Its valuation may be giant, but that's because the company is a cornerstone of the Internet and has one of the best operating models around. The company has succeeded at creating value not only for its shareholders, but for its customers as well. I think this value-creation monster is just getting warmed up here, and the most exciting services (and profits) from the company are yet to come.

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