Overreaction to Yahoo Results: Catch the Panic Sellers

Yahoo (YHOO) is getting little love from the analyst community after reporting its Q1 results last night (see conference call transcript):

- Deutsche Bank notes they remain on the sidelines on shares of Yahoo! after in-line 1Q results. With the stock down 9% in after hours trading, they think the stock at this point could still face more downside pressure. At $29.50, the stock is trading at 36x 2007 and 29x 2008 earnings estimates, in-line with the Internet Media group at 36x '07 and 27x '08 earnings, but with slower growth (15-20% vs. group at 20%-25%).

Despite positive commentary by management at an industry conference for Panama, search results did not deliver 1Q upside. The high expectations were muted by only a modest contribution from Panama, with flat PPC rates and slower decline on RPS. Meanwhile, the display ad segment grew only 20%Y/Y vs. DB's 25%Y/Y estimate and below its historical rates of 30-35%. Firm thinks there is an oversupply of inventory on the non-premium side and the proliferation of the social networking sites will continue to pressure pricing.

For 2Q, they now expect $1,260mn in revenues, $486mn in EBITDA and $0.12 in GAAP EPS and 2007 estimates are now $5,226mn in revenues (+15% Y/Y), $2,115mn in EBITDA and $0.54 in GAAP EPS, versus prior estimates of $5,249mn, $2,125mn and $0.55 respectively.

- Piper Jaffray notes Yahoo generated net revenue of $1,183M, below their estimate of $1,201M and Street consensus of $1,208M, and even further below recent positive sentiment and firm's conviction that the company would see upside due to better than expected Panama results. PJ notes their enthusiasm about Panama likely should have been tempered by a historical perspective that Yahoo nearly always dead-centers their guidance, as they did this quarter producing net revenue within $8M of the mid-point of their guidance and EBITDA within $35K.

Is Panama working? The answer seems to be yes, but not nearly as well or as quickly as the firm had thought. Monetization growth was likely slowed by weakness from small customers overpowering the increased spend seen by large branded search advertisers.

They believe Yahoo will be in a "show me" box on Wall Street for some time to come. At $30 per share, Yahoo trades at approximately 22x EV to 2008 PF net income (the best metric due to Yahoo's structurally higher tax rate and large cash and investment positions), while
Google, a company with far faster growth, more market power, and better earnings history trades at 23x. Maintains Mkt Perform and $30 tgt.

- Stifel says YHOO has three core components to its business " search, branded or display advertisements, and fees. In the quarter, the search business did not show any early signs of material marketplace improvements as was increasingly suggested (and priced in) throughout the quarter. Overall, YHOO saw a revenue per search decline in the quarter, which was weakest at the beginning of the quarter and strengthened to turn positive by the end. To be fair, the company stated on its last call to not expect improvements until 2Q. In the branded business, the company noted that its top-200 advertisers grew by 20% in the quarter compared to 25%-30% in 4Q06 and 33% in 3Q06. In the fees business, the company saw paying customer growth of 24% but reported fees revenue growth of only 9% (10%- 11% after one-time adjustment). All in, YHOO has two components of its business showing noticeable decelerating trends and one in the midst of a restructuring in which management is betting on a double-digit 2H improvement. At 27x fully- taxed 2008 FCF estimates, they believe investors can afford to be patient and possibly attain shares in the low-to-mid $20s within this calendar year. Maintains Hold.

- ThinkEquity is reiterating their Buy rating and 12-month price target of $36. While Yahoo! (YHOO) reported an in-line 1Q07, they believe growth should begin re- accelerating in 2Q07 and the company remains well positioned to outperform 2H07/FY08 as monetization improvements in both search and display build momentum. Firm also believes YHOO's leading positions in video, mobile, and social media should drive greater user growth, further increasing the company's long-term advertising opportunity. They expect YHOO's planned marketing push in 2Q07, the upcoming TV upfront, and the announcement of key hires, e.g. CFO and Head of Audience, to act as potential near-term catalysts.

YHOO indicated that revenue-per-search [RPS] Y/Y declines stabilized in 1Q07 and that the
company is seeing strong increases in click-through-rates (CTRs) and improved cost-per-clicks (CPCs) heading in 2Q07. YHOO also announced that Panama's Japan rollout in 2Q07 remains on track, and the company should roll out Panama to Korea and Europe in the near future. Firm's checks indicate strong adoption trends/approval ratings from advertisers, and they believe the long-term opportunity for improved search monetization remains +40-50%, as YHOO is forecasting double-digit growth in overall revenue per page view in 2H07. They also believe YHOO will begin to add display and video advertising products to the Panama advertising system in the coming months which could further accelerate advertising yield.

Notablecalls: I have mixed emotions regarding Yahoo. On the bearish side, display ad segment growth is deaccelerating as there seems to be growing competition that is driving pricing down. Also, search is not doing too great as revenue per search is going down. Fee revenue grew only 9% y/y while customers grew 24%. On top of that, the valuation is still quite high. On the positive side, Panama's just starting to gain traction. Remember, it was only launched in Feb, giving it half a quarter to prove itself. With the upcoming launches in Japan and Europe Panama's impact may become more visible over the next couple of quarters. Plus, if ThinkEquity's right about the addition of display and video advertising products to the Panama advertising system, there could be significant upside.

Overall, while there are many negatives to the story, I think last night's reaction was a bit too harsh. Sitting back at my old desk, I would put out some early bids around $29 to catch the panic sellers. Would risk around $0.50.

YHOO 1-yr chart