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Wednesday, July 26, 2006

Does Online Ad Growth Make Yahoo! Look Cheap?

Stocks: (YHOO)(GOOG)(EBAY)

The FT recently wrote that online ad growth will move up at a compound rate of 22% from 2005 to 2010. Advertising revenue continues to move from newspapers, TV, and radio to the internet. And, Yahoo!'s share online eyeballs continues to be huge. The internet giant still has 402 million unique visitors worldwide, a number that no other web property can match.

So, what's up, actually down, with Yahoo!'s stock. There seems to be some panic that the world will fall apart. Wall of worry? Maybe. But, investors are not climbing it.

Yahoo!'s stock was at $43.66 in January and trades at $26.71, down 40% in six months. That's $20 billion in market cap, gone.

Yahoo!'s price to sales in now 6.3 according to Yahoo!Finance. Google is at 14.4. EBay is at 6.6.

The disparity between the price to sales multiple at Yahoo! and Google is too great. Overall ad revenue increases are going to level out the growth rates of the two companies, so the delta between them cannot exist forever.

Will Google's fall or will Yahoo!'s valuation rise. Probably some of both. Google may come back to the 10 times range, especially if it has one quarter that is short of phenomenal. But, Yahoo!'s should rise because the online ad revenue tide is rising inexorably. With its market share, Yahoo! cannot help but be pushed up.

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

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