Yahoo, Google & Web 2.0 Reality Check


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?


William Mandra

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: 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.


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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.

Michael Eisenberg

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 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)

mark evans

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.



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.


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 :)

Garam Chai

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.


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,!

Eric Brandel

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.

Om Malik

hey larry,

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


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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