Knock, Knock. Yahoo’s There?

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Brian A.: “You wrote: ‘Right now [with the stock at $475], Yahoo is valued at significantly more than Ford and General Motors, combined.’ This is probably more a matter of low investor expectations of Ford and General Motors than excessive expectations of Yahoo.”

Really? You don’t see any problem with Yahoo earning $10 billion-a-year after taxes in a few years? That’s a third more than General Electric made this past year, and General Electric is one of the most profitable companies in the world. It’s nearly half again as much as Exxon/Mobil earned last year, and Exxon/Mobil is not a small or unprofitsable enterprise. A surprising number of Internet users buy drive cars and buy gas. Yet $10 billion in after-tax earnings is what it would take for Yahoo to be selling at “12 or 13 times earnings,” at its recent $475 a share price.

(Since last week’s column, Yahoo is down 100 points, but it’s still valued at more than twice General Motors — and could easily bounce back up another 100 points or another 1000 points – why not? At least that seems to be the attitude of some of today’s more optimistic investors.)

The math could hardly be simpler: At nearly $475 a share, and more than 263 million shares outstanding, the company was valued at $125 billion (today, a paltry $96 billion). And $125 billion is 12 or 13 times $10 billion. So with a market capitalization of $125 billion and earnings of $10 billion, the company would be valued at 12 or 13 times its earnings.

Now, you may say, “12 or 13 times earnings – for a hot growth stock like Yahoo? Are you crazy?” But I would submit that once it’s earning $10 billion a year after tax, it would be so large it might not be such a hot growth stock.

And in any event, in the meantime, there’s the small matter of getting from its current after-tax earnings — $16 million in the last 9 months — up to $10 billion.

It’s possible, of course, but how many companies today earn $10 billion a year in profit after tax? It’s really not an easy thing to do. Even Microsoft, with its near-monopoly on operating systems and office-suite software around the world hasn’t reported earnings quite that high.

I am a fan of both Yahoo and Microsoft, but there’s a difference. Though I use Yahoo every day, I’ve never paid them a dime and don’t plan to. Nor do I pay attention to any of the banner ads. They’re a lot easier to ignore than TV commercials. And if they ever did become hard to ignore, I’d just stop using Yahoo.

I use Microsoft products every day, too. (And, currently, at least, could not possibly stop.) The difference is that, between the licensing fees built into the cost of my computers plus the software I’ve purchased directly, I’ve paid Microsoft lots of money. And they’ve got hundreds of millions of customers. And still they are only now barely getting into the $10 billion-a-year profit range.

What if Pokemon or Harry Potter puts up a portal, and half Yahoo’s visitors start using that?

So give me a break.

Yes, if everything goes right, as it may, these terrific folks at Yahoo (and they are terrific) may one day, conceivably, build a company worth as much as Ford. Or even Ford plus General Motors plus Dow Jones plus the New York Times Company plus a billion or two in spare change,. That’s how Yahoo was valued for a moment on January 4, when the market-makers temporarily bumped it up to 500-1/8 in order to activate the stop-loss orders that short-sellers had entered at 500. (Or so a cynic might surmise.)

It is conceivable.

But why would anyone possibly pay that much for it today? Or even anywhere even vaguely close?

I saw Lou Dobbs on the “Today Show,” and I like Lou Dobbs, but he was giving really dumb advice, if you ask me. He was asked whether someone with $2,500 should go into the market at these prices (it was actually January 4, I think, that he was on the show) — and whether they should go into the high-flying tech stocks — and he said yes (no!) but that they should get professional advice because this is not a field that is easy for the amateur to dope out.

Well, I ask you: What kind of professional advice is a client with $2,500 going to get? And what will it cost him? If it costs even just $100, that’s 4% right there. And what will that advice be worth? A great many professionals had “buy” recommendations on Yahoo when it was selling for more than Ford, GM, Dow Jones and the New York Times Company combined.

So this is all really a little silly, even though the Internet itself is very real, and my cell phone is magic, and Yahoo is terrific, and the future is so exciting I sometimes want to burst.

For now, I’ll stay short a little Yahoo, a little Amazon, and long the kinds of stocks nobody with any sense of fashion could possibly want.

Monday: Free Stuff, Hunger, and Y2K.