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June 15, 1999
Yahoo! for Dad
Trading at $119 1/4 as of June 14, 1999
Yes, yahoo for you, Dad! And perhaps, Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> is for you. Read on. Next -- Big Entertainment from TMFEdible
* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.
by Matt Richey ([email protected])
Do you remember that time you almost freaked out when you thought you'd lost your electronic organizer? You gave $20 to the guy who found your little Casio. And, if necessary, you probably would've paid him a lot more than twenty measly bucks. An incident like that makes you realize the value of your business contacts, addresses, and important dates. Wouldn't it be nice to have all of that information, plus your e-mail and personalized news, safely stored on a secure server? And, how about having it all accessible from anywhere on the globe and from any information device -- all for free?
In a nutshell, that's Yahoo!'s vision for the future. Even now, Yahoo! offers many of those services to its 60 million worldwide users. And with 60 million pairs of eyeballs looking at Yahoo! content, the company offers an enticing value proposition to advertisers, as well. Pretty nifty business model, huh?
Five short years ago, an impressive economic model was the farthest thing from the minds of Yahoo! founders Jerry Yang and David Filo, who were then Ph.D. candidates in Electrical Engineering at Stanford University. Yahoo!, which is supposed to stand for "Yet Another Hierarchical Officious Oracle," was the two students' guide for keeping track of their personal interests on the Internet. Back then, websites were scattered, and www.yahoo.com became known among early Internet adopters as a great starting point from which to venture out on the Web.
Building off its first-mover status as the navigational guide, the company went public in 1995 and transformed itself into a popular "Web portal" by acting as the TV Guide of the Internet. Nowadays, Yahoo! still acts as an information aggregator, but also offers numerous communication and e-commerce services. From search engine to portal to global Internet media company, Yahoo! has come a long way in its first five years.
Admittedly, calling Yahoo! a media company is somewhat vague, but there's no other way to describe such a vast collection of products and services. The company aggregates news, weather, and sports; offers communication tools such as e-mail, instant messaging, message boards, and chat; and transacts e-commerce through classifieds, auctions, and merchant services. Best of all, the consumer services don't cost a single red cent. Advertisers support all of this content by paying for the banner ads that grace the top of each page. The company is also beginning to earn fee-based revenue from small businesses seeking help in setting up online store fronts and internal communication hubs.
Much like the great economics of a newspaper, but without the printing and distribution costs, Yahoo!'s financial model is a wonder to behold. Back in April, Yahoo! reported first quarter net income of $25 million on revenue of $86 million (press release). Revenue grew by 180% and net income by 670%. This growth was especially good considering that the first quarter is traditionally the softest quarter for advertising revenues. Since the net income figure includes a slug of investment income, let's focus on the $19.3 million of after-tax operating income, as this is a better indicator of the results from the core business. After-tax operating margins of 22% are a level of profitability that very few businesses can achieve.
The income statement was great, but the balance sheet was even better. The company's cash balance actually grew faster than profits thanks to excellent capital management. Cash and liquid investments of $655 million now make up an amazing 80% of total assets.
The cash piling up on Yahoo!'s balance sheet is evidence of the unique cash generating power of "light" business models. By that, I mean companies that have a relatively small proportion of their assets tied up in bricks-and-mortar infrastructure and have minimal ongoing capital expenditures. For Yahoo!, total property and equipment of $19.9 million is only 2.5% of total assets.
As Yahoo! expands into new Web businesses such as auctions and small-business services, no additional physical investment is required. All that is needed are creative people to come up with cool ideas for products and services on the Web, and then programmers to make it happen. And once a website is in place, it scales effortlessly as users click-in. Yahoo! refers to this phenomenon as "leverage." The company builds user applications, then watches user trends and markets accordingly.
Recent acquisitions and partnerships have expanded Yahoo!'s presence as a global media company. On May 28, Yahoo! closed its acquisition of free home page building site GeoCities. The two companies will be integrating their operations extensively so that users will be able to "drag and drop" Yahoo! features such as e-mail, search, chat, and message boards into their own customized home page. By offering an expanded array of community features to its users, Yahoo! stands to benefit tremendously.
Studies have shown that the average visit to a website lasts only seven minutes. But with the addition of chat, the average visit jumps to 30 minutes. Imagine the additional page views, and thus advertising revenues, that will accumulate during those additional 23 minutes. In addition, a chat participant will spend an average of $50 per commerce order versus $30 for a non-chat participant. Integrating GeoCities and Yahoo! will certainly require some hard work, but nothing like a brick-and-mortar acquisition typically requires.
Yahoo! also recently announced an intriguing partnership with Sprint PCS to provide Yahoo! services such as e-mail, calendar, news, sports, and stock quotes to Sprint PCS wireless subscribers. On the same day, Yahoo! announced its acquisition of Online Anywhere. Both of these moves are part of the company's "Yahoo! Everywhere" strategy to make personalized Yahoo! content available from any information device at any time.
So Dad, if Yahoo! has its way, you won't have to worry about having all of your valuable personal data locked up in one precarious little Casio organizer. You'll be able to access the same e-mail account, address book, calendar, news, and stock portfolios from any device the world over.
Of course, Yahoo!'s competitors may have other plans for the future of information access. Among its direct competitors such as Excite and Lycos, Yahoo! is far and away the superior operator. The most serious potential threat is Microsoft and its $24 billion in cash. In this message board post, Tom Gardner sums up Yahoo!'s risk from the software behemoth:
"The ultimate question is: Will Microsoft derive an economic advantage from Yahoo!'s success? Where is the threshold at which Microsoft says, 'The blow that we'll take to our reputation for chipping Yahoo! down will be LESS substantial than the economic blow we'll take for not doing so.' In the case of Netscape, that time came pretty early on (after all, Netscape dove right into Microsoft's space AND tried to humiliate them publicly. Bad idea.) But how soon, if ever, will the storm hit Yahoo!?"
Up 'til now, Yahoo! management has executed superbly, but the company's path of success may lead it to the moat that surrounds Fort Microsoft. In addition to Yahoo!'s competitive threats, an investor ought to consider the company's valuation. Here's a model of the growth assumptions that are "built into" the current stock price. As you weigh the risks and rewards, here are some other resources to help you along:
Yahoo! Company Information:
Trades on Nasdaq under symbol YHOO
Yahoo!'s website: www.yahoo.com
Yahoo! Information Center
Current Quote
Yahoo!'s Chart
Other Related Links:
Yahoo! Message Board
Rule Maker Companies Message Board
Yahoo! Cash Prince -- 4/23/99
Destination Yahoo! -- 6/4/99