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January 11, 2001

Yahoo! Earnings Meet Estimates But First Quarter Will Be Weak
By Mylene Mangalindan, The Wall Street Journal

2001 Earnings Will Flatten Nasdaq Even More ... Weiss comments

NEW YORK - Yahoo! Inc.'s fourth-quarter earnings met Wall Street expectations, but the Internet company warned that it expects 2001 revenue and earnings to fall below projections, suggesting that the outlook for Internet advertising is far worse than many expected.

Yahoo's stock plunged 19% in after-hours trading, wiping out $3.3 billion in market value.

The unexpected news from the Internet-portal company, which acts as an online gateway to content and services such as free stock quotes, news and e-mail, was a 2001 revenue forecast of $1.2 billion to $1.3 billion, barely above the $1.1 billion in revenue that the company reported in 2000. Analysts had expected the company to generate about $1.42 billion in 2001 revenue, according to First Call/Thomson Financial, with estimates ranging from $1.32 billion to $1.5 billion.

The company's projections for earnings also caught Wall Street by surprise. It forecast 2001 pro forma earnings per share of 33 cents to 43 cents. In comparison, analyst Derek Brown of W.R. Hambrecht & Co. had expected the company to earn 59 cents a share.

Yahoo's results are "fine from the standpoint of fourth-quarter expectations, but they are shockingly disappointing in terms of the guidance for 2001," said Fred Moran, an analyst at Jefferies & Co., who projected the company's 2001 revenue at $1.5 billion.

"We thought they would have cautionary words in terms of the first half and maybe a flattening out of growth, but they're talking about a substantial decline in revenue and a halving of their earnings in the first quarter and expectations for the full year that are well below any published expectations on the Street."

Yahoo's results were much anticipated as a measure of just how badly the Internet market has deteriorated and whether its recovery is imminent. The company's stock hit a 52-week low of $25.06 recently as fears mounted that Yahoo would miss analyst estimates or lower 2001 guidance. Few expected the Internet bellwether to escape the fourth quarter unscathed by the online-advertising slowdown.

Earnings warnings and misses may be second nature to investors by now, but they are certainly not yet priced into the shares of many companies. At $25.50 a share, Yahoo still trades for over 65 times earnings. That is a high multiple for any company, but it is especially high for a company who is projecting dismal earnings for the entire year.

Yet Yahoo isn't the most over-inflated stock on the block. Other stocks in the Nasdaq-100 Index, such as Applied Micro Circuits, Network Appliance, and Palm, all trade at over 200 times earnings. Siebel Systems trades at a whopping 381 times earnings! On average, despite the Nasdaq's 39% drop in 2000, the Nasdaq-100 Index still trades for 133 times earnings.

Don't be lulled into thinking that stocks can't fall any lower. Investors won't continue to ignore earnings disappointments as they pile up over the course of the next couple of weeks. A whopping 700 U.S. companies are expected to announce that fourth-quarter earnings will miss estimates, the most for any period since at least 1995 -- and possibly the most ever, according to First Call/Thomson Financial.

In other words, the Nasdaq bubble has been punctured, but there is still plenty of hot air to squeeze out -- and there's a hard landing dead ahead.

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