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Summary:

Not such a good day for Yahoo and other search engine stocks. Yahoo’s modest financial performance in the fourth quarter of 2005 prompted a quick sell-off, and already the second largest search engine is down 10% for the day. Suddenly there is growing anxiety about Google […]

Not such a good day for Yahoo and other search engine stocks. Yahoo’s modest financial performance in the fourth quarter of 2005 prompted a quick sell-off, and already the second largest search engine is down 10% for the day. Suddenly there is growing anxiety about Google and the whole “internet advertising thing.” Some analysts have already started the bear talk on Google. There is belief that Yahoo’s weaker than expected earnings are prompting a sentiment shift on the search stocks – from positive to less than positive. Canary in the mine, as per Joseph Weisenthal stock options and their cost,

Check how much Yahoo! will be spending on stock options in 2006, according to the guidance they gave yesterday it’ll be somewhere in the ballpark of $420-$450 million. That compares to a mere $52.4 million in 2005, an enormous increase.

We got to wait for Google’s numbers; and I bet they will be just fine. Unlike Yahoo, Google is highly focused on advertising sales, and despite its occasional new product the company knows which side of the bread is buttered. I think their decision to buy dMarc yesterday was proof that Google is only about advertising.

The big question is if Yahoo (and Google) stocks do continue to take a pounding, then what it does to the Web 2.0 start-ups. The falling stocks bring shopping sprees to quick halt. Given that GYM(IAA) is the only exit, one wonders about the future of these tiny tots.

Jason Fried offers some advice: “Believe it or not, it’s far better (and easier) to build a small, profitable, healthy company that sells a product or service to a thousand small customers than it is to sell to that one magical big buy-out customer.”

PS: Where is Paul Kedrosky when you need him?

  1. Umm, what will happen to these tiny tots? Gee, maybe they’ll have to start working on something as revolutionary as a business plan? Will wonders never cease.

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  2. hey larry,

    i though with that headline, i should go for subtle sarcasm in the post. clearly did not work ;-)

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  3. Larry is exactly right. The little guys will have to focus on actually creating revenue and, more importantly, profit (gasp!). It’s not going to be enough to create a new wizbang super duper RSS aggregator and slap some google ads on there and hoe and pray that one of the big boys picks you up.

    Weblogs Inc is a decent example. Their business plan never involved being bought out. They were profitable on their own. It may be tough to replicate their network of bigger name blogs, but surely someone could setup a “long-tail” blog network.

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  4. I blame the pasta I had for lunch, it clearly was inhibiting the ability of my brain to pick up on the underlying humor.

    Now, off to build my free social bookmarking website, re.diculo.us!

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  5. The little guys will have to focus on actually creating revenue and, more importantly, profit (gasp!).

    It applies to big guys as well. Wall Street’s reaction to Yahoo!’s numbers yesterday is ample indication of that.

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  6. erhh… that should be “hope and pray” not “hoe and pray”

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  7. Weblogs Inc is a decent example

    To had just 2 Million or so in revnues and had 103 bloggers on the payroll and nine fulltime staffers. I bet their bottomline (profits) would be much much less than the 2 million and i guess my neigbourhood dry cleaner would have a much better cash flow than that :)

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  8. People are insane greedy, more so the analysts..look at their results below and tell me that they are not performing!!! They expecting a 50% increase in revenue every other quarter…they are nuts!!

    <———————————–>
    The company ended the year with 12.6 million subscribers, an 11 percent increase from 11.4 million in September. The subscribers paid $186 million in fees during the fourth quarter, a 38 percent increase from the same time in 2004.

    Spurred by its steady growth, Yahoo added another 674 workers during the fourth quarter, expanding its payroll to 9,816 employees at the end of 2005.

    Excluding its ad commissions, Yahoo forecast its 2006 revenue will range from $4.6 billion to $4.85 billion — a 24 percent to 31 percent increase from 2005. The average 2006 revenue estimate among analysts is $4.77 billion, according to Thomson Financial.

    For all of 2005, Yahoo earned $1.9 billion, or $1.28 per share, on total revenue of $5.26 billion. Net income for 2004 totaled $839.6 million, or 58 cents per share, on total revenue of $3.57 billion.

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  9. om,
    i don’t falling stock prices will have a big affect on GYM’s M&A activity – at least not their interest in start-ups. if GYM is interested in expanding their service portfolios, there will always be an enthusiastic audience for their shares.

    mark

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  10. Dinesh ,people would not have high expectations if yahoo stock’s PE is down to earth.

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  11. This is crazy. We cannot draw conclusions from one quarter. Stocks tend to over-react to small 1 cent misses. They can fluctuate wildly in the short term. But Yahoo’s business has 250MM customers worldwide which they are steadily monetizing. The long term outlook here is positive. I highly suggest that you all read the information in yahoo’s own words. You can find a full transcript at the Internet Stock Blog at http://internetstockblog.com/article/5871. There is clearly an issue that Yahoo has lost ground to Google on adsense. They are addressing it a bit late but they get the problem.(I quoted that relevant section from the transcript on my blog above — (Om – appropos your post yesterday on lifting blogs — SeekingAlpha encourages you to quote up to 400 words as long as you link back)

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  12. The link to my Blog above was wrong. It is now correct. Full disclosure. I am long Yahoo since $11.

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  13. One small thing, Om. Don’t pay any attention to the stock option expensing. I know it is mandated by GAAP but the truth is that stocks are (or at least should be) valued on their future cash flows. Stock option expenses are not cash and therefore should not be effecting the stocks price. I guess with investors paying attention to it and earnings the focus has shifted, though the “true” valuation of the company is not.

    Furthermore I would say that Yahoo had great growth (as I’m sure Google will). Just because analysts misforecasted should be no reason to punish these companies in the market. Take a look at concensus analyst estimates for any number of companies (high tech and non tech) and you will see that analysts consistently overestimate EPS. This is a problem endemic to Wall Street.

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  14. [...] All around the blogosphere, pundits are busy writing eulogies for the latest Bubble. Yahoo misses a single estimate and suddenly everybody’s losing their nerve. I’ve said it before and I’ll say it again. This is no way to build a bubble, people! Shake it off and let’s make with the hype! We need focus, we need belief and we need to drink more of that Koolaid (mmm… cherry!). [...]

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  15. It’s not a bubble until no one is complaining.

    It’s not a bubble until there are so many people excited about it that everyone stops worrying about it being a bubble. The canary you should watch is Om Malik.

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    In the future our reader will support rich media and allow for virtually cost free video and audio distribution.

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  17. I’m not much of a stocks guy personally, I have a finacial advisor for that stuff, but I think the biggest with investor-types and companies like Google and Yahoo is just expecting way too much. Remember, these companies started out as search engines – period! All of the other neat little products and ideas they are coming up with maybe helping them earn a profit, but they are distracting them from their primary focus. Is Google a search engine or an internet advertising company??? This distraction is hurting Web 2.0 companies more than alot of people realize. Do the following google search: site:http://www.protopage.com now look at the search results. Notice that there are only titles but no description? This is because protopage is based on Web 2.0 technology, AJAX, which the search engines can’t handle yet.

    -b

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  18. [...] It was a bad week for search related companies. Yahoo disappointed, and with it the sentiment on search companies turned a little bearish. Soon after, there was an uproar when DoJ asking Google and others to hand over certain information. (An alternate opinion is here!) Suddenly we were all thinking about cached life. Google plummeted nearly 8.5% of Friday, posting its worst day on stock markets thus far. Niall and I thought, it would be pretty sweet if we did a podcast recaping it all. Om and Niall PodSessions: Search around the world Governments and search engines in other countries were busy moving forward with their own search plans despite the distractions in Silicon Valley. France and Germany announced a collaborative effort to develop the Quaero project to counter the power of Google and Yahoo! over content in those two countries. The new search engine will receive around $2 billion from the European Union to develop new search technologies especially focused on audio and video. In Korea NHN’s Naver.com continues its stellar growth with over 40% of the country’s search market. Google currently has only about 2% of the Korean market. Naver adds mashups and detailed information directly on search results pages assisted by efforts from its millions of subscribers. The company has expanded into Japan and China behind the power of its gaming network and founded a U.S. subsidiary. All these topics and more in this week’s podcast. The podcast is 21 minutes long, a 9.8 MB download. You can listen to it by downloading it, or subscribing to our feed or on iTunes. [...]

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  19. [...] I agree with Om Malik, Google is an advertising company. They dabble in other high-tech ventures by building tools for others to use. Yahoo! is a content provider that looks for the best of the new technology and uses it to help people build content and relationships. Can you compare them? Yes, but carefully. Does Yahoo! create value? Definitely. [...]

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  20. [...] Om Malik on Broadband : » Yahoo, Google & Web 2.0 Reality Check (tags: google yahoo) [...]

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  21. [...] Toni Schneider, an entrepreneur who recently left Yahoo to become a partner with San Francisco-based True Ventures, sees parallels between how Google and Yahoo were treated by an over-optimistic Wall Street. “The numbers are pretty good and everything is growing,” says Schneider. “I don’t see any gloom or doom.” Jeff Clavier, who understands online advertising and search game pretty well pointed out that Google, which sells ads on its own Web sites as well as ones run by other publishers, is shifting more ad revenues to its own network. According to Clavier, that indicates that Google’s core business of search is improving. [...]

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