Yahoo! lobbies shareholder. Not sure I am convinced.
On September 2007, I suggested that Yahoo! could be a $100B market cap company by 2010. But to do that, the best route would be to go private, clean up shop and then come back stronger.
Going private, I argued, would shelter YHOO from the demands and short-term focus of Wall Street. Most importantly, it would avoid the non-stop benchmarking to Google, who at the time especially was flirting with all-time highs as a much higher growth investment opportunity exposed to online advertising and search.
To get to the $100B market cap figure, I used numbers from a previous analysis I did all the way back in October 2006 which projected a range of revenues for 2010:
AnalysisLet’s look at the numbers:
US Revenues
If US online advertising becomes a $25 to $32 billion industry. For simplicity’s sake, we’ll say the US online advertising industry will generate $30 billion in 2010.
Even with search getting 40% of that figure and Yahoo! trailing Google, Yahoo! will easily be able to earn anywhere from 15 to 30% of the total pie in the US (It will get 18% this year).
At 15% of a $30 billion online US ad industry, Yahoo!’s revenues will be $4.5B in the US alone. That’s just in America, and that’s at the lower range of 15%. If Yahoo! can a) make up market share in search and b) maintain/grow its lead in display, video and other formats of online advertising, it can generate 30%, that’s $9 billion. Google will generate 25% in 2006 of the total US ad industry and that’s just off search.
That’s in 2010, four years from now, when anything is possible. Google today logged in 25% of US online ad fueled largey by search alone. So for Yahoo! to go from a market share in search of 30% to 35% (for example) and improve monetization through Panama, then it is not inconceivable for it to hit 25% or 30% of US advertising dollars if its display/banners and video grows (forget all subscription revenues).
International Revenues
And, that’s just the US. In Q2, Yahoo! international revenues grew 38% globally versus 27% domestically in the US. I always project online revenues to be 1 to 1 for US versus international. So you can double those numbers by two:
Yahoo! could be generating revenues of $9 to $18 billion in 2010; its profit margin was 24% and 36% in 2004 and 2005 respectively.
Say it can maintain margins of 25% (hey, they won’t be hiring as aggressively as Google and there is only so much purple paint out there), this means that it can be generating profits of $2.5 to $5 billion per year, at a P/E of 25 (it’s now at 33 today), that’s a market cap of $62.5 billion to $125 billion in 2010, or an average of $93.75 billion.
With those kinds of revenues and margins, it will have more than $10 billion in cash, so a market cap of just over $100 billion.
Right now, Yahoo! is worth $36 billion.
Toda, in an effort to lobby shareholders to maintain independence, Yahoo! projects revenues of $8.8B by 2010 - or half of what Google did in 2007. I am not trying to rain on Yahoo!’s parade, but this is exactly what we shareholders have been complaining about: too little, too late.
Do not get me wrong, there is nothing per se wrong with projecting an $8.8B a year franchise… my problem is that Yahoo! has no credibility left. I would maybe consider believing this if upper management was changed and enough Board members changed to bring in a new dynamic.
Note: Long YHOO - albeit lighter.
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