Yahoo! Investors Pin Hopes on Early Panama Release

I'm a little surprised that Yahoo! (YHOO) stock is jumping more than $1 today after it reported fourth quarter numbers last night. If you look at the company's 2007 guidance, most metrics are below current consensus forecasts. Revenue growth for the fourth quarter was 15% and 2007 growth will fall between 9% and 20%, according to the company. Yahoo! hardly appears to be a high growth Internet leader anymore.

That said, the stock is rallying as investors hope that an early release of their new ad system, Panama, will boost the bottom line of their network's online advertisements. Without actual evidence that Panama will boost Yahoo!'s ad margins (the program launches in February) and help it regain market share lost to Google (GOOG), I'd be cautious going forward. If Panama stops the bleeding, YHOO shares will likely trade well into the thirties, but if the platform's bark is stronger than its bite, investors might be let down.

Full Disclosure: Long GOOG and short YHOO at time of writing

Yahoo! Report Tonight Likely Won't Overly Impress

Ever since I suggested a long Google (GOOG), short Yahoo! (YHOO) paired trade here back in July of 2006, it's been very interesting to compare the earnings reports of both companies to see exactly how the search market is playing out on the web. Yahoo! leads off by reporting its fourth quarter tonight (Google is slated to release results next Wednesday) and I doubt their results will be overly impressive.

The argument for the paired trade, in my mind, is twofold. I believe Yahoo! is becoming less and less relevant on the web, as Google takes market share in search and other competitors eat into their other businesses. In addition, there is a valuation gap that has Yahoo! trading at a premium to Google, despite its slower growth rate. Currently, Google trades at 35 times 2007 earnings estimates, versus Yahoo! at 46 times.

The two most common arguments for why Yahoo! trades at a premium are its more diverse product line (Google gets nearly all of its profit from search, whereas Yahoo! is less concentrated there), and its equity investment in publicly traded Yahoo! Japan (Yahoo! owns 34%, worth approximately $8 billion). I feel these two arguments are lacking in two respects.

First, Yahoo!'s more diverse product line, while evident, will not necessarily translate into better operating performance. Since the bottom line is the most important driver of shareholder value over the long term, I don't think it warrants a huge valuation gap with the likes of Google.

Second, investors who merely subtract $8 billion from Yahoo!'s market cap to account for their stake in the Japanese company and recalculate the stock's P/E ratio are being too simplistic. This action does reduce the company's valuation (YHOO's 2007 forward P/E would drop from 46x to about 36x if you subtract $6 from YHOO's share price) but such an adjustment is not enough. The reason is because Yahoo! includes its share of Yahoo! Japan's operations in its own income statement.

If their 34% share of the Japanese company wasn't accounted for at all by Yahoo when it reports earnings, then investors would be right in simply adding $8 billion to their valuation models. However, investors in Yahoo! are indeed already paying for Japan's business. If people want to add the equity value of the Yahoo! Japan stake to Yahoo's overall valuation, they must also subtract its contribution to Yahoo!'s reported earnings so nothing is double counted.

We'll see what tonight's report from Yahoo! brings. Since I put on the paired trade about six months ago, Google shares have risen by 19%, while Yahoo! has dropped 15%. So far, so good.

Full Disclosure: Long GOOG and short YHOO at time of writing

Tech Analyst at ThinkEquity Partners Capitulates

A fellow blogger hits the nail on the head looking at a recent analyst call on IBM stock.

Another Golden Opportunity in Citrix Systems

Software maker Citrix Systems (CTXS) was one of the ten stocks I highlighted on the 2006 Peridot Capital Select List (which, by the way, has returned 18% year to date - look for an announcement about the 2007 Select List in early January). After posting a gain of 40% through the first six months of the year, in my Select List Mid-Year Update I recommended investors take their profits as the stock traded above $40 per share. It appears that we are getting another chance to make money in the name.

After an earnings disappointment, Citrix is trading back down to $28 and change, which is where I recommended purchase at the beginning of the year. Given that the company has the ability to grow sales and earnings at a low to mid double digit rate, the current valuation looks very attractive.

Estimates for calendar year 2007 stand at about $1.50 per share. The company's balance sheet is pristine, with no debt and $736 million in cash, which equates to $4 per share in net cash. So, investors buying CTXS at $28 are getting a stock with an enterprise value of only $24 and $1.50 in earnings power. This equates to a 16 forward P/E multiple, which in my view is too pessimistic given Citrix's growth outlook.

I would expect Citrix shares to head well into the thirties again during 2007, and as a result, suggest investors reenter the stock. Evidently, CTXS management agrees the shares are undervalued, as they just announced a new $300 million share repurchase authorization.

Full Disclosure: I own shares of Citrix Systems (CTXS), as do Peridot clients.

Amazon Bulls Might Need to Calm Down

Wall Street is apparently thrilled with the third quarter earnings report from online retailing giant Amazon.com (AMZN), as judged by the stock's $4 (12%) jump in today's session. While I am not long the name, if I was, I'd be trimming it. Amazon is a retailer, plain and simple. Therefore, the current P/E multiple the stock garners is quite ridiculous. Back in 1999, the bullish argument for the company centered around the idea that without physical stores, Amazon could earn much higher margins than a Borders, or a Best Buy, or a Wal-Mart.

That thesis, however, has proved to be incorrect. Amazon's margins are not any better than your traditional big box retailers. In fact, Amazon's operating margins trail those of Target, Wal-Mart, and Best Buy. Turns out that warehouses carry the same costs as actual storefronts. With most retailers trading at less than 1.0 times revenue, Amazon trades at closer to 1.5 times.

The company's growth rate does exceed its competitors, for now anyway. Since Amazon has only been around for about a decade, they can roll out new products for a while before becoming mature enough to truly become a one-stop shop for everything. That said, I don't see how the company deserves a P/E multiple of more than 25 or 30 times earnings, as their growth should slow to below 20 percent going forward.

Right now shares of Amazon trade at about 80 times this year's expected earnings. Even if the company can grow the bottom line by 67 percent, as investors are expecting (that sounds optimistic to me), we're still looking at a 2007 P/E of more than 50 times. I just don't know how anyone can justify such a lofty price for the stock. If you think I'm wrong, please share your views. 

Google Still Eating Yahoo!'s Lunch

Shares of Google (GOOG) are soaring about $30 per share, or 7%, today after another very impressive quarterly report. After a profit warning from Yahoo! (YHOO), many Google skeptics postulated we could see some slight weakness in the search leader's business, but they turned out to be very wrong. At least for now, issues are Yahoo! appear to be more company-specific than industry-specific. The way I see it, Yahoo! is simply becoming more and more irrelevant in the portal space.

As I have been doing periodically, I will once again update my views on the long GOOG/short YHOO paired trade I originally recommended at prices of $403 and $32, respectively. Today's huge move up for Google, coupled with a 1 percent drop in Yahoo! brings us to $455 and $23 per share. This results in both stocks trading at about 35 times prior 2007 estimates. After the Google report, 2007 EPS numbers should move from $13/share toward $14/share.

Now that their multiples have essentially converged, which was the thesis behind the paired trade, what do I expect? At this point, I think it is reasonable to put Google at 40x and Yahoo! at 30x forward earnings. If Google hits $14 next year and Yahoo! meets their numbers, we are looking at around $20 per share for YHOO and $560 for Google. That would give this trade another 15 or 20 percent upside from here. As a result, I'm letting it ride.

Google/YouTube Deal Finalized

Very interesting (and dead-on in my opinion) take on the Google/YouTube deal, courtesy of former Internet analyst Henry Blodget's blog:

http://www.internetoutsider.com/2006/10/youtube_and_seq.html

Google Still An Active Deal Maker

Internet search leader Google (GOOG) remains on the cutting edge, making deals with various web properties and content companies. After locking up an exclusive advertising pact with MySpace, reports indicate the company could partner with, or buyout online video leader YouTube for as much as $1.6 billion. While many people will argue whether or not the potential price tag is too high, investors need to realize that forking over a few billion to secure two of the Internet's most visited sites is chump change for Google.

With $10 billion in cash and a very strong stock price to use as currency for deals, trading 1% or 2% of their company for these deals is merely a drop in the bucket. Not only will these deals allow Google to maintain impressive growth rates in its U.S. business, but it further widens the gap between them and the competition. Today's announcement of a deal with Warner Music and Sony BMG to distribute fee music videos is yet another example of how Google is leading the way in online content innovation and the advertising that will undoubtedly support such initiatives.

With Yahoo's stock stagnant and Google shares jumping again today, I just checked out my long Google/short Yahoo paired trade to see where we stand now that Yahoo has fallen from 32 to 25 and Google has jumped from 403 to 428. Despite the postitive return from the trade thus far, Google still trades at a discount to Yahoo on projected 2007 earnings per share (33 times versus 39 times). As a result, I am keeping the trade on for now.

Analyzing Yahoo!'s Profit Warning

Two months ago I outlined a long Google/short Yahoo! paired trade as a way to play the possible p/e multiple convergence of the two leading Internet advertising companies. This week's third quarter warning from Yahoo prompted an ugly sell-off in the name. Google shares were down for the day as well in sympathy, but it dropped far less than Yahoo!, which is exactly what the paired trade is supposed to capitalize on.

The question we have to answer now is, "What do we make of the Yahoo! shortfall?" There are two ways we can go here. One, the Yahoo! warning signals that the economy is slowing significantly and advertising clients are pulling back their ad budgets. This would hurt Google in the same way as Yahoo!. On the other hand, it could simply be that Yahoo! is becoming less and less relevant in the advertising space, and Google continues to steal market share.

Back in July when I first wrote about this trade I was in the latter camp. I remain there today. I think Yahoo! is getting beaten at the same game they once dominated. Google is dominant enough in domestic search that most of the market share gains have been made, but they still are doing better than Yahoo! on a relative basis.

This is not to say that a slowing economy would not hurt Google as well. When the day comes where we see dramatic ad budget cutbacks, it will be time to exit both stocks. I just don't think we are seeing that yet. Last quarter we saw a bad quarter from Yahoo!, followed by a strong report from Google. That supported my thesis. This week we found out that Yahoo! again is having trouble. I think Google will post a solid third quarter, and as a result, I am keeping the paired trade on for now. When the online advertising market starts to suffer due to the business cycle beginning to turn over, then I'll take the profit from the trade and move on to something else.

Full Disclosure: I have a position in the paired trade mentioned above, long shares of Google (GOOG) and short shares of Yahoo! (YHOO). 

Apple Shares are Pricing In Positive Catalysts

In recent months I recommended investors take a close look at shares of Apple (AAPL) after they concluded a long descent from a high of $86 per share all the way down to the mid 50's. While the P/E multiple on the stock has never been low, even after a 35% haircut in the shares, the company does have more than $10 in net cash on its balance sheet, as well as something that fewer and fewer companies have going for them at this stage in the business cycle; excellent growth

.In anticipation of new product announcements, shares of Apple have rallied lately and are surging nearly $3 today to more than $72 each. For those of you who did some bottom-fishing in the 50's, I think it may be wise to take a few chips off the table. The company's outlook remains very bright, and growth managers will want to own the stock, but I think a lot of good news is being priced into the shares. Any disappointments regarding the specifics of the company's new products, and we could see some of the recent gains given back.

Apple remains one of the most attractive growth opportunities in the technology space. I just think after a 30% rebound from the lows, slight profit-taking might be in order as investor demand right now is quite elevated.