Friday, January 20, 2006

Analysis of Yahoo!'s fourth quarter earnings

Yahoo! announced its fourth quarter results recently. The stocks took a pounding as the earnings fell short of the consensus by one cent. It is to be expected that Yahoo!'s growth is continuing to slow down in the coming year. In addition to that, Yahoo!s overture division will lose some revenue once MSN uses its adcenter software service for billing advertising. This is expected to reduce Yahoo!'s earnings a bit in the coming year.

Let us look at the growth rates from quarter to quarter and year to year to see how things are moving for Yahoo!. Year over year, the earnings growth in the final quarter is 15%. Quarter over quarter - the revenue increased by 12.8%. While some of the increase is because the December quarter is typically the best quarter and the September quarter is the slowest quarter of the year. On the positive note, the operating income margin increased from 19% in 2004 to 21% in 2005.

How does this compare to Google? We analyzed the search engine giants in three separate pieces. Links to them are noted below:

http://finnews.blogspot.com/2006/01/google-analysis-part-ii-in-earlier.html
http://finnews.blogspot.com/2005/12/tale-of-three-stocks-in-internet.html

Google is a momentum stock. A lot of people have piled on to make a quick buck including some large mutual funds. Expect the mutual funds to continue to pull out while booking their profits. If profit taking continues on Monday, it can help take the air out of the bubble. Google's growth is expected to slow to 60-70% year over year. If the P/E drops to 60 or 70, we will have a price of 330 - 370. This is including the expected blockbuster earnings in the fourth quarter of this year.

Further drop in the stock on Monday is expected to drive the speculators out and make the stock more reasonably priced. Is Yahoo! cheap as Cramer is claiming? I dont think so. Yahoo! is priced fairly or slightly above the earning growth rate for the coming year. I would wait for the next couple of weeks to see how things play out before jumping in to buy any stocks. One can jump in to buy index funds if the prices fall as the P/E of S&P500 index looks reasonable at this time.

1 comment:

Roland said...

Hey FinanceGuy - Have you seen this article about Google's bad secret and why they face a tough time with the Feds this year?

http://boycottgoogle.blogspot.com/2006/01/google-stars-in-risky-business.html
Google Stars in Risky Business... -
Here is an interesting analysis about Google's big drop Friday.