TCS Daily


Should you Yahoo?

By James K. Glassman - April 3, 2000 12:00 AM

Last week was a rough one for tech stocks, as the NASDAQ composite officially slid into "correction" territory, meaning a decline of at least 10% from its high. Why the sell-off? Well, it may seem like there's been a lot of bad news lately for tech investors, with celebrated bull Abby Joseph Cohen recommending that investors keep less of their money in stocks and Fed Chairman Alan Greenspan raising interest rates. What's more, Wall Street is becoming less forgiving of dot-coms without short-term profit potential.

Don't despair. The economy is still growing like gangbusters, in fact the pace of growth is accelerating. In the fourth quarter of last year, the US economy grew faster than it has in any quarter since 1984. In the last three months of 1999, our economy grew at a sizzling 7.3% annual rate.

Also remember that no matter what happens in the stock market on any given day, Internet usage is headed in only one direction - north. In 1999, according to Telechoice, customers for high-speed digital subscriber lines increased from 50,000 to 500,000. More than 2 million consumers now use cable modems to get super-fast access and a majority of American adults are online. You want a bullish sign for the future of e-companies? An astounding 91% of America's teens now use the Internet. A little less than two thirds of them actually have access from home, so they use schools, friends' houses, libraries, whatever it takes to get online.

No matter what happens to NASDAQ this week, the Internet is not going away. Regular readers of this column know that I'm for investing in stocks at any time, for almost any reason, as long as you plan to hold the stocks for a long period of time. So, assuming you want to invest in tech stocks, is there a particularly intriguing opportunity?

I've been thinking a lot about Yahoo (YHOO) lately. I'm not the only one. The Value Line Investment Survey (valueline.com) has delivered outstanding results over a long period of time. Each week, Value Line rates stocks for their "timeliness" based on a formula that considers company fundamentals and market performance. Out of thousands of stocks spread across various industries, Value Line picks just 100 companies to receive a timeliness rating of 1. Yahoo is a 1 in Value Line's most recent issue.

Yahoo should not be confused with some money-losing dot-com waiting for a buy-out from Microsoft or AOL. Yahoo has real earnings and they are growing very rapidly. In 1999, the company enjoyed a solid 24% net profit margin and delivered earnings of roughly $143 million. For 2000, Value Line is projecting that Yahoo will earn $265 million in net profits, with a doubling of revenue to $1.1 billion.

It's true that Yahoo trades at an astoundingly high price/earnings multiple, but that multiple may be justified. This company is a dominant player in new media. Yahoo.com is the most popular destination on the World Wide Web, with 44.7 million unique visitors in February of this year, according to Media Metrix. It's not hard to see how this company could be making $2-3 billion in earnings in ten years on perhaps $10 billion in revenues. Trading at a recent 172, more than 30% below its high, Yahoo is worth a look.
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