Yahoo Gains May Bode Well for Other Firms

Impressive gains in users and ad revenue helped Internet bellwether Yahoo Inc. report a stellar second-quarter profit Wednesday--raising hopes on Wall Street that other Net-related companies will produce strong results in coming weeks.

Dramatic sales growth and improving bottom lines could spur fresh gains in many Net stocks, some analysts said.

Yahoo, the leading Net portal company, reported a second-quarter loss of $15.1 million, but that was due largely to the cost of several acquisitions. Without those expenses, the company would have earned $28.3 million, or 11 cents a share, surpassing the 8 cents expected by Wall Street.

Sales also topped estimates, more than doubling to $115 million.

Yahoo stoked enthusiasm that Internet user growth will continue to expand as people spend more time at favorite Web sites. More important, it showed that advertisers will pay to reach those users.

“What it demonstrates is the force behind the Internet continues to grow,� said Emeric McDonald, research director at money management firm Amerindo Investment Advisors. “I’d expect to see strong results from a number of other leading companies.�

Some analysts, however, cautioned investors against extrapolating too much from Yahoo’s numbers. Not only is Yahoo profitable--a rare feat among Net companies--but it appears to be gaining market share at the expense of rivals, they said.

Nevertheless, the consensus is that short-term growth is sufficiently vibrant for other Net companies to exceed analysts’ earnings expectations in the second quarter.

“It probably bodes well for the other Internet [portal] guys,� said Ned Brines, co-manager of the Phoenix-Engemann Growth fund. “It also translates well for the transaction guys. And if that’s working, it translates for the infrastructure guys.�

Yahoo’s showing only heightened expectations that America Online will announce good numbers when its reports earnings July 21. The company is expected to earn 11 cents a share, according to First Call Corp.

Amerindo’s McDonald expects such Net firms as Inktomi, Priceline.com and Vignette to produce improved results.

Alan Lowenstein, co-manager of the John Hancock Global Technology fund, is high on AOL and software firm Inktomi. He also likes Exodus Communications, DoubleClick and RealNetworks.

Because many Internet start-ups are unprofitable, Wall Street values them largely based on revenue growth and increasing Web page views, a gauge of the popularity of their sites.

Investors are betting that the most popular sites will eventually generate strong revenue and earnings.

Going forward, however, companies where page-view growth outdistances revenue growth could be in trouble, said Michael Murphy, editor of the California Technology Stock Letter. That would indicate that the companies can’t bridge the gap between having a popular site and making money, he said.

Indeed, losses are expected to widen for some major Net firms, including bookseller Amazon.com. Some Wall Streeters are discouraged that the company has sacrificed immediate profitability in the quest for market share.

“Right now, investors are tolerant of short-term losses,� said Alexander Cheung, manager of the Monument Internet fund. “But as companies burn up equity [raised in public offerings], if they don’t find a way to be profitable, investors might not be so tolerant in the future.�

As for Yahoo, in recent quarters investors have bought the stock in the days leading up to earnings reports in anticipation that profit would be strong. But the stock has sold off immediately afterward, as investors took profits.

In the last two days, however, Yahoo has fallen on heavy volume as investors may have tried to avoid the post-release sell-off.

That could signal that Yahoo shares will rally this morning. After closing at $167.06, down $8.06, the stock rose as high as $173 in after-hours trading.

* STELLAR QUARTER: Yahoo’s profit beats estimates by nearly 40%. C3

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Can the Rebound Last?

Internet-related stocks have been resurging in recent weeks after a spring dive. Second-quarter earnings reports from leading firms could determine the trend from here. Weekly closes and latest for the Interactive Week index of 50 major Net-related stocks:

Nov. 6: 143.11

April 9: 347.75

Wednesday: 320.05

Source: Bloomberg News

Great Expectations?

Here are analysts’ consensus estimates for sales and earnings per share (EPS) of some key Internet-related companies in the second quarter, ranked by estimated percentage sales growth from a year ago:

*--*

Ticker Est. Q2 Est. growth 1998 Est. ’99 Company symbol sales* from Q2 ’98 Q2 EPS Q2 EPS Ebay EBAY $38 +321% $0.02 $0.03 Inktomi INKT 17 +171 -0.13 -0.12 Amazon.com AMZN 310 +167 -0.12 -0.51 Doubleclick DCLK 37 +111 -0.14 -0.13 Earthlink ELNK 79 +107 -0.20 -0.22 Lycos LCOS 39 +106 -0.05 Nil VeriSign VRSN 17 +102 -0.12 -0.02 Onsale ONSL 86 +69 -0.21 -0.59 Real Networks RNWK 25 +67 -0.04 -0.02 America Online AOL 1,300 +64 0.06 0.11

*--*

*in millions

Source: First Call