Yahoo! Teed Up by Lehman

A Lehman Brothers analyst says that the marketing dollars of troubled dot-coms are being "stretched as far as possible," and that the leading portals, like Yahoo! and America Online will get "the last dollar" these ailing companies cough up. It's a pretty bleak picture, one that also prefigures those that will emerge standing as the dust settles on these early and uncertain days of the online economy.

By Nico Detourn (TMF Nico)
August 28, 2000

Shares of Yahoo! (Nasdaq: YHOO) were stomped nearly 8% today following the release of a Lehman Brothers report that took a "cautious stance" on the world's largest exclamation mark.

Lehman analyst Holly Becker expressed a "worrisome" outlook, saying Yahoo! faced a "difficult environment" that has not been sufficiently discounted into the company's valuation, which "remains rich" despite its shares being down 46% from their highs. She reiterated a "neutral" rating on the stock.

With most of Yahoo!'s revenues coming from advertisers, Becker sees business from smaller, cash-strapped dot-com companies drying up, and she is "receiving little comfort" as she looks for signs that traditional advertisers will pick up the slack.

Investors took false comfort from Yahoo!'s "blow out" second quarter results, Becker said, noting that the dot-com crunch didn't hit until June, which gave the company "only one difficult month." The concern is that as belt tightening by the dot-coms continues, Yahoo! itself will face a full third quarter on nuts and berries.

At the same time, if Yahoo! can "pull off another strong quarter, the stock may continue to stall" as investors wait to see if the company makes it through a difficult fourth quarter, "where year-ago dot-com activity was the most irrational." Of course, after that comes next year's first quarter, and then the quarter after that, which would round out a year's worth of quarters. One way or another, "it is "only a matter of time before we see the impact on Yahoo's results," Becker said.

The last dollar
Drawing on data from Nielsen//NetRatings, the Lehman report shows Yahoo!'s ad impressions in July declined 20% to their lowest levels since last November. Acknowledging that July is the first month of a seasonally slow third quarter, Becker believes the unprecedented fall-off is "another sign of an impending slowdown" in dot-com ad spending. The report also shows dot-com advertisers making up 61% of Yahoo!'s advertisers and 68% of its ad impressions.

But as Fool writer Zeke Ashton recently noted, Yahoo!'s management has addressed this issue and has stated that only about 10% of its revenues come from financially questionable clients. Management has also said that during the second quarter all of its top 50 advertisers and 98 of the top 100 renewed their contracts, which run an average 225 days.

Nevertheless, industry sources suggest the advertising environment "continues to worsen," with dot-com layoffs commonplace and bankruptcies increasing, the Lehman report says. It also notes industry feedback suggesting pricing pressure and an "increasingly aggressive" Yahoo! sales force, and comments skeptically on aggressive estimates for online advertising growth that have been made by Forrester Research (Nasdaq: FORR), Jupiter Communications (Nasdaq: JPTR), and the Internet Advertising Bureau, and which remain in place despite this cautionary evidence.

The Lehman report also says that while the marketing dollars of troubled dot-coms are being "stretched as far as possible," and are unlikely to last beyond Christmas, it is the leading portals, like Yahoo! and America Online (NYSE: AOL), who will get "the last dollar" that these ailing companies are able to cough up.

A pretty bleak picture. Yet looking beyond the next few quarters, it also prefigures the longer-term survivors who will emerge standing as the dust settles on these early and uncertain days of the online economy. The issues raised by the Lehman report are valid. But if the online economy itself is valid, then the validity of the report's conclusions are tied to its limited time frame, which doesn't look beyond the end of the year.

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