FOOL ON THE HILL: An Investment Opinion
In the midst of a high tech cash crunch, Yahoo!'s ad sales are noticeably down. But even if Yahoo!'s customer base temporarily has to hold back on its marketing expenditures, the company has the diversified revenues and cash to ride out the dry time.
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Last Thursday I wrote a Rule Maker column about Yahoo! (Nasdaq: YHOO) that provoked a small (below average, actually) amount of hate-mail. My favorite reads, in part:
"Every time I read Motley Fool, it gets more ridiculous. The Fool now has an endless supply of young naive writers like you who either bash companies to death or drool all over them without objectivity or critical comment, like you did with Yahoo! How can a reader take such a fawning, one-sided piece seriously... Do you realize how out-of-touch you look?"
Ah, my adoring public. :)
I'm always amused by email insisting "that last column destroyed your credibility." I get these at least once a week, and they're loads of fun. I write for The Motley Fool. We wear silly hats to press conferences and have been known to caper in public. Every April 1 we unapologetically pull a gigantic hoax. Our goal is to teach people to think for themselves when it comes to managing their money, and on a regular basis somebody gets upset that they might actually have to evaluate what one of our columns has to say, and decide for themselves whether or not they agree with it.
If people are upset that writers wearing multi-colored hats with bells on them aren't divine oracles spouting infallible truth, I hope somebody puts an "adult access" block on CNBC for them. The Motley Fool is supposed to make you think. The last thing we need around here is credibility interfering with the learning process.
That said, what made this email stand out is that its author actually got around to making a point eventually. Yahoo!'s ad sales are in sorry shape, as evidenced by the fact that if you reload www.yahoo.com about 10 times the banner ad will be for Yahoo! itself maybe seven of those times. The vast majority of Yahoo's ad space on its main page is apparently going unsold. How can I be bullish on Yahoo! if it can't sell advertising?
Strangely enough, I have an answer to this one. It's not THE answer, it's just MY answer. A semi-educated guess, one Fool rushing in. The answer is another question: "Who normally advertises on Yahoo!?"
The main purpose of banner ads is to drive traffic to somebody's website, so the companies that take out banner ads tend to have websites. Those who use banner ads as their primary form of advertising are often Internet companies.
The first six months of this year have seen a major and specific crash in a lot of high-tech Internet stocks. My guess as to the trigger is that after Microsoft discontinued its stock buyback plan in January (due to a merger invoking certain SEC regulations), the dilution from its massive option grants to employees and uncertainty over the antitrust trial dragged the stock down 50% over the next six months. The "halo effect" from this dragged down the valuations of the entire market segment, even companies like Red Hat (Nasdaq: RHAT) and VA Linux (Nasdaq: LNUX), which look to profit from Microsoft's pain and which are experiencing sustained triple-digit growth.
This has affected more than just stock prices, it has stifled initial public offerings of smaller companies. LinuxCare has nearly collapsed after it staffed up in anticipation of IPO funding and then canceled its IPO at the last minute due to changing market conditions. Without the cash from that IPO, it couldn't organize new revenue streams fast enough to pay for the increased fixed costs before it ran out of cash and wound up laying off many of the new hires. The sad thing is there wasn't anything fundamentally wrong with its business; it just got sucker-punched by badly timed growth leading to a simple lack of liquidity.
With high-tech IPOs out of fashion for a moment, even small pre-IPO start-ups suddenly face a cash crunch. Most venture capitalists are loath to fund a business in the absence of a clear exit strategy. No IPO in the future, no seed money today.
Even healthy small high-tech companies that have money in the bank become cautious about spending it in these circumstances. Suddenly, they MUST fund from operations, and they have no ready supply of investment capital. If they drain their savings, that's it. Hectic expansion is a lot more nerve-wracking without a stock market or venture capitalist to bail you out.
Wandering back to Yahoo!'s advertising, remember that Yahoo! has more Web traffic than any other site. This makes it the most valuable (and hence some of the most expensive) advertising space on the entire Internet. But it also means it needs more advertising customers than anybody else to fill up all the banner hits it serves.
If high tech companies everywhere have been suffering a (real or perceived) funding crunch and the resulting timidity about spending their reserves and expanding without a safety net, what's the first thing they're likely to cut back on? Marketing expenses, like banner ads. And hence, Yahoo!'s surfeit of "house ads" for Yahoo! Mail and such.
If this is the case, then it really doesn't say anything bad about Yahoo! It hasn't become less desirable, its customer base is simply spending less in the short term. In the long term, that customer base still has to advertise to attract and retain customers, and Yahoo! is the greatest single source of eyeballs on the whole of the Net. Yahoo! has the cash to ride out a dry time for ad revenues, especially since it has diversified to other sources of funding like shopping and online bill paying. Perhaps it will end up dropping its ad prices to lure timid customers back, but most likely the capital crunch in the high tech industry will blow over soon.
If you don't agree with this assessment, by all means flame away. Don't forget to imply that the rest of the world will simultaneously come to the same conclusion you have and boycott all future Fool content. And by all means include the word "amateur" as if it's a bad thing, and an admonishment along the lines of "get off your butt and go talk to real people in the real world, instead of writing your star-struck fantasies."
I think I might frame that last one.