On July 20th, I blogged that I was going to buy Yahoo (YHOO). I did just that and was up 15% on the trade until yesterday when Terry Semel announced that the Sept quarter is going to be at the low end of the range on revenues and earnings. The stock is back down below $26, and my 15% gain is up in smoke.

So what to do?  One friend doubled down on his YHOO trade yesterday. He hasn’t blogged about doing that so I won’t link to him. Another friend is taking a wait and see approach.

I did some digging around yesterday and from what I hear, the display ad market is healthy for everyone I checked in with. Search seems to be doing fine too.

Saul Hansell’s article in today’s NY Times has a number of good quotes, most of which indicate to me that the online ad market is healthy and doing well.

I suspect it’s an issue of being overly agressive in forecasting. As Dave Moore of 24/7 Real Media says in Saul’s article:

Mr. Moore said it was possible that Yahoo, in its race to compete
with Google, was simply overoptimistic in its forecasts and too eager
to appeal to investors. “You are expected to grow every
quarter,” he said. “There is a law of large numbers. It just gets
tougher and tougher to please the Street.”

Wall Street is a game of expectations. But I prefer to look at the facts. If Yahoo! does come in at the low end of the range, they’ll have revenues of $1.1bn and operating cash flow of $450mm this quarter. That’s an annualized rate of $4.5bn of revenue and almost $2bn of cash flow. At its current market cap of $35bn, that’s 17.5x cash flow, not taking into account its balance sheet and its ownership in Yahoo Japan which is a significant asset. And cash flow is growing at 15% year over year.

News Corp has annual cash flow of $3.8bn, which is growing at less than 10% year over year, and trades at 16x cash flow.

So I think Yahoo! is fairly valued, and possibly cheap, at $25/share. I am going to join my friend and buy some more.

PS – Thanks to Drew for the title of this post. That was the subject line of his email to me yesterday when the news hit.

#stocks#VC & Technology