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September 25, 2006

What's Going On With Yahoo!?

Yahoo! (YHOO) guides down and its shares trade off 12%. On the same day, Viacom (VIA, VIA.b), Time Warner (TWX), Disney (DIS) and CBS (CBS) all trade higher. Yahoo! says that advertising in economically sensitive industries including automotive and finance showed a sudden weakening. These two advertising categories are important for traditional media companies. At the same conference where Yahoo! guided lower, most traditional media companies said that there have been no recent changes in the ad environment. If anything, scatter markets for cable and broadcast TV have strengthened a little. What is going on here?....

Is Internet Vulnerable to Same Cyclical Forces as Traditional Media?

The valuation discrepancy between Internet ad plays like Yahoo! and traditional media stocks is enormous. With the Internet viewed as the share gainer, part of the premium is related to the belief that Internet advertising was not vulnerable to the general slowdown witnessed in traditional ad growth through most of 2006. Is it possible that weakness in auto and finance advertising, ongoing for years in traditional media, is finally spreading to Internet advertising? If so, has Internet advertising grown large enough, matured enough, to be vulnerable to the same cyclical forces that impact traditional media?

Is Yahoo! Losing More Market Share to Google?

Analysts will no doubt point to Yahoo! losing Internet advertising market share to Google (GOOG) (and others?). Yahoo! is undergoing a widely discussed and delayed transition in its monetization strategy for Internet search. This will also be pointed to as an explanation for Yahoo's guidance.

Is Ad Spending Falling All Around?

Or maybe the problem for Yahoo! is that advertising expenditures are taking another leg down. Recent data from newspaper and radio companies and local TV stations show weakness in July and August extending into September. This latest weakness follows lower estimates of ad growth that occurred earlier in 2006.

My Answer Is

I suspect that all three explanations have some validity. But until we see some revenue results from other Internet companies, I think investors should assume that Internet advertising is not as independent of larger advertising trends as previously assumed. The Internet is clearly a long-term market share gainer. The business model of Yahoo! or Google is superior in terms of margins and return on capital than traditional media. The Internet stocks still deserve big premiums compared to traditional media. But maybe the premium should be a little lower -- at least 12% lower it seems.

Posted by Steve Birenberg at September 25, 2006 12:07 PM in Media