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Monday, July 31, 2006

Confusion Engulfs Yahoo!


Amtech/JSA Research upped Yahoo! from "Hold" to "Buy" today according to MarketWatch reported that First Global Securities downgraded the net giant on concerns that it will continue to lose share to Google and Microsoft's MSN.

With Yahoo!'s shares off almost 2% to $27, the bearish view seems to be ascending. AOL's announcement that it would launch a major video site probably did not help Yahoo!'s cause.

It is becoming increasingly difficult to determine who is right about Yahoo!. One thing is for certain. Very few stocks have seen their prices cut nearly in half (from $43.66 in January to $25 this month) while growing at a rate of 30%. Especially a company as large as Yahoo! ($5.3 billion in 2005 according to Yahoo!Finance). Morningstar projects that Yahoo! will continue to grow at a 23% per annum clip over the next five years. Not bad.

Depending on which measurement service investors look at, Yahoo! is still the most visited web destination in the world. It is not a "one legged table" like Google. Short-term, diversifying beyond search may have hurt Yahoo! some, but over time having a number of strong online businesses should help the company. The identity crisis at AOL may also benefit Yahoo! A seemless transition from its subscriber model to advertising is likely to be difficult for the Time Warner web unit. MSN also seems to be making little progress. ComScore says that Microsoft's share of the global search market is a mere 9%.

If Yahoo! is well-positioned as a combination search and content destination, the share price will catch up to the success of the business model. If that happens, Yahoo! is will be on its way back toward $40.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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