I doubt there's a better time to debate the future of Yahoo! (Nasdaq: YHOO), the world's most recognized Web portal. Given the state of online advertising and Yahoo!'s dependence on that market, being bearish on the company these days is as trendy as Britney Spears, Christina Aguilera, and the Boy Bands put together. Still, I don't envy the bear this week: We're dealing with a company that has a dominant brand, a scaleable and efficient business model, and can generate gobs of cash.
Over the last couple of quarters, however, Yahoo! shareholders learned how bad the online ad market has become. Every financial publication in existence can't help but write about Yahoo!'s biggest flaw. Assuming Rimpy would concede the aforementioned business strengths, I've framed my argument around a three-point plan: 1) The online ad market will recover, 2) when it does Yahoo! will emerge with more market share, and 3) the company's ability to diversify its revenue stream will ultimately make it stronger.
With dot-com companies dropping like flies, and the survivors reducing expenditures, corporate advertising spending has slowed. The numbers don't lie, however, and online ad revenue reached roughly $8 billion last year, according to Yahoo!'s conference call.
While dot-coms fall, bricks-and-mortar companies are furthering online initiatives. More importantly, those companies won't settle for second best, looking only to the biggest names on the Web (such as Yahoo!). Some bears suggest established companies won't embrace the Internet as an ad medium. Yahoo!'s customer base doesn't support that claim, comprising 60% of Fortune 50 companies. What's the significance of that? The big boys bring more capital, sign longer contracts, and there's no risk of default.
With bricks-and-mortar companies entrenched in online advertising, Internet research firm Jupiter forecasts that global ad spending will see a compounded annual growth rate of 32%, to $28 billion by 2005. That figure implies the online ad market will only be behind television, radio, and newspaper spending. However, online advertising brings advantages to the table traditional channels don't. The online medium provides companies with the ability to target specific ads and measure their success.
Not only that, but the number of users is growing at a tremendous rate. Market research firm International Data Corporation estimates there were 250 million Internet users at the end of 1999. By the end of last year, that number jumped to 330 million. People are logging on to the Internet to do more every day, whether online shopping or surfing. When companies set out to allocate their advertising budget, it's a good bet they'll look to the Internet because that's where the people are.
Once the slowdown ends, the top players -- including AOL Time Warner (NYSE: AOL) and Yahoo! -- will command even more traffic. Some of the lesser portals will be forced to either target specific areas of the Web or cease to exist. That bodes well for Yahoo! because more ad dollars will comes its way. There's already been evidence of this. In 1999, according to Epoch Partners research, the company held 11.5% of the total online ad market. Its market share expanded from 11.6% in the second quarter of last year to 14% in the third quarter. When the year ended, it held 12.5% of the entire market.
Of course, there's more to the story than ad revenue. The company continues to launch new services and enhance existing offerings. Yahoo! Shopping, Yahoo! Store platforms, and Yahoo! Auctions all present additional opportunities for growth. The company generates revenue in a variety of ways, such as fixed rents and transaction fees. It boasts nearly 12,000 merchants, consisting of some of the biggest names in retail. And with Yahoo! enabling $1.4 billion in transactions during the fourth-quarter, imagine the long-term possibilities.
Moreover, business services currently make up about 15% of total revenue and are growing by the day. The company continues to announce Corporate Yahoo! wins, the corporate version of My Yahoo! Broadcast.com -- a division of Yahoo! that consists of live and recorded video and audio events -- logged 1,067 events in the last quarter. The company also announced plans for a business-to-business exchange.
Then there's the possibility of Yahoo! switching to a subscription model. While it's unlikely that the company would ever charge for searching the Web, it is considering doing so for certain services. For example, a Bear Sterns analyst recently stated that charging $2 per month for Yahoo! Finance would translate into $700 million in after-tax net income by 2002.
So, while the company might have hit a bump, the good times have yet to begin.
Why not being a "Bull" !
Stox
Over the last couple of quarters, however, Yahoo! shareholders learned how bad the online ad market has become. Every financial publication in existence can't help but write about Yahoo!'s biggest flaw. Assuming Rimpy would concede the aforementioned business strengths, I've framed my argument around a three-point plan: 1) The online ad market will recover, 2) when it does Yahoo! will emerge with more market share, and 3) the company's ability to diversify its revenue stream will ultimately make it stronger.
With dot-com companies dropping like flies, and the survivors reducing expenditures, corporate advertising spending has slowed. The numbers don't lie, however, and online ad revenue reached roughly $8 billion last year, according to Yahoo!'s conference call.
While dot-coms fall, bricks-and-mortar companies are furthering online initiatives. More importantly, those companies won't settle for second best, looking only to the biggest names on the Web (such as Yahoo!). Some bears suggest established companies won't embrace the Internet as an ad medium. Yahoo!'s customer base doesn't support that claim, comprising 60% of Fortune 50 companies. What's the significance of that? The big boys bring more capital, sign longer contracts, and there's no risk of default.
With bricks-and-mortar companies entrenched in online advertising, Internet research firm Jupiter forecasts that global ad spending will see a compounded annual growth rate of 32%, to $28 billion by 2005. That figure implies the online ad market will only be behind television, radio, and newspaper spending. However, online advertising brings advantages to the table traditional channels don't. The online medium provides companies with the ability to target specific ads and measure their success.
Not only that, but the number of users is growing at a tremendous rate. Market research firm International Data Corporation estimates there were 250 million Internet users at the end of 1999. By the end of last year, that number jumped to 330 million. People are logging on to the Internet to do more every day, whether online shopping or surfing. When companies set out to allocate their advertising budget, it's a good bet they'll look to the Internet because that's where the people are.
Once the slowdown ends, the top players -- including AOL Time Warner (NYSE: AOL) and Yahoo! -- will command even more traffic. Some of the lesser portals will be forced to either target specific areas of the Web or cease to exist. That bodes well for Yahoo! because more ad dollars will comes its way. There's already been evidence of this. In 1999, according to Epoch Partners research, the company held 11.5% of the total online ad market. Its market share expanded from 11.6% in the second quarter of last year to 14% in the third quarter. When the year ended, it held 12.5% of the entire market.
Of course, there's more to the story than ad revenue. The company continues to launch new services and enhance existing offerings. Yahoo! Shopping, Yahoo! Store platforms, and Yahoo! Auctions all present additional opportunities for growth. The company generates revenue in a variety of ways, such as fixed rents and transaction fees. It boasts nearly 12,000 merchants, consisting of some of the biggest names in retail. And with Yahoo! enabling $1.4 billion in transactions during the fourth-quarter, imagine the long-term possibilities.
Moreover, business services currently make up about 15% of total revenue and are growing by the day. The company continues to announce Corporate Yahoo! wins, the corporate version of My Yahoo! Broadcast.com -- a division of Yahoo! that consists of live and recorded video and audio events -- logged 1,067 events in the last quarter. The company also announced plans for a business-to-business exchange.
Then there's the possibility of Yahoo! switching to a subscription model. While it's unlikely that the company would ever charge for searching the Web, it is considering doing so for certain services. For example, a Bear Sterns analyst recently stated that charging $2 per month for Yahoo! Finance would translate into $700 million in after-tax net income by 2002.
So, while the company might have hit a bump, the good times have yet to begin.
Why not being a "Bull" !
Stox
