Yahoo (YHOO) reported disappointing Q2 earnings yesterday: revenue, operating income, and EPS all came in light. Having round-tripped the stock on the failed Microsoft deal, however, the few remaining bulls are sticking with it.
JP Morgan analyst Imran Khan, for example, cut estimates but reiterated his Overweight rating on valuation:
On an EV/EBITDA basis, Yahoo! trades at 11x our F’08 EBITDA estimate of $1.83B vs. its peers at 14x F’08 estimates.
If you’re thinking of buying the stock, however, you should probably stop there, because most of the rest of the news is discouraging. Khan believes that YHOO continues to underperform Google, but that it’s forthcoming deal with Google will help grow revenue per search:
…we believe the Google deal could help Yahoo! improve its RPS once it is implemented. The company noted US query growth of 11% Y/Y in the quarter, a slight improvement from ~10% Y/Y growth in 1Q. While the query volume growth rate improved, we believe search revenue growth significantly underperformed Google’s. On a worldwide basis, Yahoo! reported O&O search growth of 17%, compared with Google website revenue growth of 42% Y/Y.
With regard to display, which grew 11% year-over-year, Khan sees two key trends which affected, and will continue to affect, YHOO’s results. The first is user fragmentation:
Consistent with what we have seen from other companies exposed to the display market, we believe Yahoo! has had to manage the increasing fragmentation of online traffic. However, we think Yahoo! has had success in dealing with fragmentation, as the company made improvements in monetizing its non-premium inventory. The recent acquisition of Right Media has helped Yahoo! make double-digitimprovements in yields on non-guaranteed display.
The second trend is the weakening U.S. economy, which Khan expects will continue at least through 2H08:
Improvements in non-premium yields were offset by pricing pressure on the premium side, driven largely by economic weakness in the US. The economic pressure was consistent with trends reported by other companies with display exposure; Financial and CPG advertisers were particularly soft. We are modelling further weakness in 2H’08, with global display revenue up 12% Y/Y, vs. 13% growth in 1H’08.
Khan trims his FY08 and FY09 estimates from $0.76 and $0.55 to $0.67 and $0.45.
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