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Brian Bolan
Research Analyst Company Description
Technology Yahoo! is an internet search and technology platform for all media that
has established itself as the leader in its growing market. Free downloads
Jackson Securities, LLC
300 S. Wacker Dr., Suite 2450 of applications, tools and other media based products have helped to
Chicago, IL 60606 broaden the idea of Yahoo! from more than just a search engine to a
destination site and platform for new media delivery.
Ph: (312) 253-0578
Fax: (312) 986-0560
Valuation and Recommendation:
bbolan@jacksonsecurities.com
There is certainly room to grow for Yahoo! as the search market and
numerous other media outlets increasingly move their budgets online.
That being said, we note that Yahoo! trails Google in several categories
and faces other risks from companies like Microsoft and others. We
recommend investors BUY shares of Yahoo!
Jackson Securities, LLC seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decisions.
Please also refer to the important disclosures found on page numbers 16 and 17.
Analyst Certification is found on page number 16.
Yahoo! (YHOO)
Introduction to Yahoo............................................3
Key Products………………………………………....3
Industry Outlook……………………………………..5
Management Discussion……………………….7
Earnings Analysis………………………………8
Growing by Acquisitions………………………9
Click Fraud……………………………………….10
Risks……………………………………………….11
Valuation………………………………………….12
Thesis……………………………………………..14
Appendices
Earnings Model………………………………….15
Introduction to Yahoo!
Key Products
Convinced that mass traffic was the way to make the most on the
Internet, Yahoo focused on keeping visitors on its site, providing
original content and thus delivering more advertisements to
consumers. With popular properties like Yahoo! Finance, Yahoo!
Maps and Yahoo! HotJobs the company has been ranked number
one in terms of the number of visitors per month for the last
several years.
Yahoo! has also focused on the individual user and has provided
fee services that attract and keep users. One the of the biggest
successes in this arena has been the Yahoo! Fantasy Football
league. Fantasy Football has exploded in popularity over the last
few years and we expect this trend to continue. We note that
Fantasy Football is a major driver in the third quarter of the year
and is a major portion of the number of paying customers in that
quarter.
Other areas where users pay for services can found throughout the
entire Yahoo! network. In the most recent quarter, Yahoo! had
13.3M fee paying customers, up more than 49% from the same
period one year ago. We believe that this is a key metric and is
one we will follow closely.
Industry Outlook
The combination of the other search engines account for less than
20% of the remaining market. Some of the more popular names in
that group include Ask.com and Infospace.com. Others that are
lesser known but just as interesting include names like IceRocket
and Snap. It should be noted that emerging technologies
developed by these smaller players in the industry are capable of
shifting the status of the current business model.
Looking Ahead
Making your product more than just mobile ready, but mobile easy
will be a key component of future success. We have seen that
Yahoo! is intent on doing this and believe that they will continue to
be a leader in the mobile search and application platform. One
example of this leadership is evidenced by the launch of Yahoo!
Go platform at CES in January of this year. The Go platform gets
Yahoo! email, calendar, IM and other tools and applications onto
mobile devices at the hardware stage. The platform is also a
springboard for relationships with the carriers and to date, Yahoo!
has agreements with over 50 carriers world wide. We expect
Yahoo! to continue to be a leader in the mobile device category.
Management Discussion
Summary
Yahoo! has been able to hire some top tier talent, and recent
additions of note include Lloyd Braun. Braun was most recently
chairman of ABC Entertainment Television Group, a division of
The Walt Disney Company, a position he held from January 2002
until April 2004. Prior to that, he served as co-chairman of the
division from July 1999. In this position, Braun had responsibility
for all creative, programming and business areas of the division,
which encompassed Touchstone Television and ABC
Entertainment. Braun is head of Media and Entertainment.
Earnings Analysis
As reported:
When Yahoo! reports earnings, they break out revenue into two
separate categories, Marketing Services revenue and Fees
revenue. The larger of the two numbers is the Marketing services,
which is comprised of the search engine revenue and other services
performed by Yahoo!. Fees revenue, albeit quite a bit smaller
than the marketing services revenue, is still a meaningful segment
of the business and one that serves as a hedge against the
possibility of a revolt by advertisers against the web. Fees
revenues consists of memberships fees and the revenue generated
from customers for services like Fantasy Football.
The marketing services line item brings us to the idea that is TAC.
TAC is simply traffic acquisition costs, but that is where the
simplicity ends. Examples of this are found throughout the web
where a search box is positioned on a site. It will often allow for a
search of that specific site or a search of the world wide web. In
the event a user searches the web, and clicks on an ad, Yahoo!
would pay a royalty of sorts to the web site that helped facilitate
the search that ended up in a click on an advertisement. The exact
amount of the royalty is a closely guarded secret and is subject to
volatility based on performance (the number of searches and
subsequent click throughs).
Growing by Acquisitions
Yahoo has grown over the years and has done so mostly via
acquisition. Notable large acquisitions in the past include Mark
Cuban’s Broadcast.com (streaming media), Overture (payment
solution for advertising) and HotJobs (Job Search). Yahoo! has
shifted its focus to the smaller developing companies in the
internet such as Flickr (photo hosting) and Del.icio.us (social
tagging).
Flickr 3/ 20/ 2005 <$50M C alled "photo-blogging", ties in well with D el.icio.us
D el.icio.us D ecember-05 <$30M Social tagging that continues to grow in popularity
D ialPad 6/ 14/ 2005 NA Allows for VO IP calls to be placed from Messanger
Click Fraud
Click fraud is a topic that the media seems to be pushing more and
more these days, without a clear end / culprit in sight. Click fraud
is a process of setting up content (possibly a blog or some other
site) and then selling ad space on the site. Recent reports state the
number of fraudulent clicks could be as high as 14.6% of all clicks.
The actual number is likely to be a bit less than that, as it was on
the high end of the range that we uncovered.
The fraud part of the equation comes into play when an advertiser
sees that they are paying for many more clicks than normal and
those clicks are conversely not translating into sales. Yahoo has
stated that they take the problem very seriously and do investigate
all claims that any clicks are fraudulent. Yahoo! has also offered
and paid refunds to advertisers that feel that they have been victims
of click fraud.
Risks
One risk that we see is the possibility that in a few more quarters or
possibly years, advertisers in general will be upset seeing all the
revenue that Yahoo! is generating from them. This might instigate
a potential shift in the business model or possibly an allegiance
among advertisers as they try to limit the amount that the search
engines make. This is certainly a reach at this point, and
something we will go into more thoroughly in future reports, but it
is still something that is in the back of our minds.
The age of the stealth Internet play has mostly come and gone, but
in the event that another company builds a better, faster and bigger
mouse trap (search product), a negative impact would be felt on
Yahoo!’s share price.
Finally, the Company has stated that it expects its growth rate to
slow and its margins to possibly shrink. This can be construed as
just boilerplate risks added to a 10K or 10Q, but the main idea is
that the company cannot continue to post triple digit revenue
growth. Many will point to the law of large numbers or the idea
that the company has reached a plateau on the new consumer front,
and we would agree with both of those ideas.
Valuation
We can see from the table that Yahoo! has a high forward multiple
within this particular set of peers. We note that a direct match for
Yahoo! is not really available as they participate in several
different businesses. This peer group is focused on the search
aspect of the business, but it should be noted that Yahoo! is also
very strong in media and media delivery.
Looking back at the range for the multiples for Yahoo!, we see the
market generously afforded a multiple of 355x turning the end of
the dot com bubble wash out. We do not believe that such a
multiple will come back to the stock anytime soon. We also note
that the low end of the range was also found at the time of the
imploding bubble, and feel that 28x for a growing company such
as Yahoo is very cheap.
We believe that the current multiple is on the low side and one
positive earnings surprise should bring the multiple up closer to the
historical mean. We believe that a 70x multiple for this years
earnings is achievable and equates to a target price of $37 per
share.
Source: Bloomberg
Thesis
Important Disclosures
Disclosure of Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the
securities described herein.
Compensation:
• The research analyst has not received compensation based upon investment banking revenues or from the
subject company in the last 12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities,
received compensation for investment banking services from the subject company or any compensation for
products or services.
• Jackson Securities does not expect to receive or intend to seek investment banking compensation from the
subject company in the next 3 months.
Market Making:
Jackson Securities does not make a market in this stock
Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher
than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from
the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than
the market price at which time the rating was issued.
Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 65.52% (38 of 58 active recommendations)
Holds – 31.03% (18 of 58 active recommendations)
Sells – 3.45% (2 of 58 active recommendations)
Jackson Securities has provided investment banking services within the previous 12 months with the following
percentage of the companies they have rated:
Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities
mentioned herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any
securities mentioned herein in any jurisdiction where such an offer or solicitation would be illegal. We are not
soliciting any action based on this material. It is for general information only, and it does not constitute a personal
recommendation or take into consideration the particular investment objectives, financial condition or financial needs
of any clients. Before acting on any advise or recommendation in this research report, clients should consider seek
professional advice. Past performance is not a guide to future performance. Future returns are not guaranteed, and
a loss of original capital may occur.
The information contained herein has been obtained from sources that we believe to be reliable, but we do not
guarantee its accuracy or completeness. Any opinions expressed herein are statements of our judgment on the date
appearing on this material only and are subject to change without notice. We endeavor to provide updates on a
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Brian Bolan
Research Analyst – Technology