YHOO: Nothing to Shout Yahoo! Over
Last September, I said I was skeptical about Yahoo (YHOO) in a post titled YHOO: Not Shouting Yahoo! Over Yahoo!
So, will Yahoo! reward a patient approach? It doesn’t look that way to me. Its free cash flow in 2006 was $700 million, half the level achieved in 2005. It is only good for a 2.3% free cash flow yield on the current enterprise value. That means essentially all of the return potential has to come from growth – which doesn’t seem like a safe bet given last year’s decline. Sure, the growth rate over the last five years is nearly 45% – but that is coming off of the lowest lows of the Internut Bust. The consensus five-year growth estimate is 24%, including a 20% decline in the current year. By implication, that means the subsequent four years would have to post average growth of nearly 40% annually. Color me skeptical. With an ROE of just 8.27%, assuming growth will be faster than that implies adding debt or issuing new shares unless they can somehow boost the ROE itself – a feat far easier said than done. Coincidentally (or not) that is about in line with the actual year/year growth rate in the latest quarter.
The latest earnings and guidance show that the skepticism was justified. The stock fell another 11% after hours, and is now down nearly 22% since my bearish call, compared with a 7.4% decline in the S&P 500.
Revenues were up – whaddya know – 8.3% and the new guidance midpoint calls for another 10% in 2008. Five year growth estimates have not budged but will now be far more difficult to meet.
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