Big Internet Earnings Week Points Up Uncertainties

By Reuters  |  Posted 01-29-2008

Big Internet stocks have fallen 25 percent to 40 percent in the last quarter and haven't looked cheaper in years. But despite expected strong year-end results, many investors are likely to shy away in the short run.

Investors are set to focus on company outlooks and how a slowing U.S. economy will lead to advertising cutbacks and more hesitation among online shoppers over the course of 2008. Yahoo posts results on Tuesday, followed by Amazon.com on Wednesday and Google a day later.

"At the moment, investors are paying an awful lot more attention to outlooks than they are to past performance," said Jeffrey Lindsay, an analyst with broker Sanford C. Bernstein. "Any sign of lowering guidance is instantly seized upon."

Google faces uncertainty over how its online ad business performs in a tighter economy and questions over shifting its computer-based business on to mobile phones, if it wins rights to U.S. airwaves and becomes a wireless operator.

Because Google does not comment directly on its outlook, investors must read the body language of Chief Executive Eric Schmidt or decipher the meaning of any passing comment Google offers about key advertisers in financial services or autos.

The Internet market leader is expected by Wall Street to post fourth-quarter revenue growth of better than 50 percent amid ongoing market share gains in Google's search business. Analysts look for revenue at Yahoo to grow just 15 percent.

Highlighting the contrast with Google, Yahoo is set to announce job cuts alongside lower earnings this week. Sources familiar with the plan say fewer than 1,000 employees could lose jobs -- about half what was rumored on some blog sites.

Yahoo's fourth-quarter profit is seen down 31 percent to 11 cents per diluted share, while Google is slated to post a 40 percent rise, excluding stock options and one-time items.

"We think at the moment, the most negative scenario for Yahoo is fully priced in," Lindsay said. Yahoo shares, which closed 5.3 percent down on Monday at $20.78, are down nearly 40 percent from year-high levels in late October.

He said Yahoo is likely to lose highly profitable broadband partnerships with AT&T Inc and others in the next 18 months, while warning of further weakness in its corporate brand advertising business as the U.S. economy hits the skids.

Lindsay sees no short-term catalyst coming out of Yahoo's expected "mediocre" results; "What investors want to see is how they are going to improve their core advertising business."

On the back of strong toy sales, Amazon revenue is expected to rise 34 percent over a year ago to a record $5.36 billion. Net profit is expected to double to about 48 cents per share.

"Amazon and Yahoo are likely to hide behind deteriorating macroeconomic conditions," Global Crown Capital analyst Martin Pyykkonen said. "They can always raise their outlooks later in the year if things improve."

CHEAP? OR GETTING CHEAPER?

Marking a dramatic reversal, Google was trading near $750 12 weeks ago -- and was forecast to approach $900 in 2008 by bullish Wall Streeters -- and now trades just above $550.

Google is trading around 32 times the 2008 earnings estimate of Bernstein's Lindsay, compared with the pricey 55 times price-to-earnings valuation that he has on Amazon.

Pyykkonen said Amazon remains "priced to perfection" -- meaning the stock price assumes perfect execution. Amazon has a price-to-earnings multiple three times that of eBay's beaten-down valuation.

Despite a 25 percent decline in Google stock since early November, Wall Street is far from capitulating. Nineteen analysts still recommend investors buy Google stock, while only three rate the shares "hold" and no one advises selling.

Clayton Moran of Stanford Group is among the most bearish analysts on Google's stock. He takes aim at the notion that Google's pay-for-performance Web search advertisements somehow insulate the company from a weakening economy.

"A pullback in consumer spending could negatively affect Google's search volumes and click prices and therefore (its) advertising revenue," Moran argued in a research note to clients as he downgraded the stock to hold from buy last week.

Moran has the lowest price target of any analyst formally following the company, at $615.

To win the airwaves needed to launch a national wireless network, Google would likely pay upward of $10 billion just for radio licenses, along with $5 billion a year over the next five years to build out the network, Bernstein has calculated.

Unless it finds a deep-pocketed partner, Google would be committing itself to a business with far lower capital returns, Lindsay argues. Until recently, most analysts had bet Google would stay away from investing in wireless networks.

But strongly worded comments from CEO Schmidt about Google's focus at the World Economic Forum in Davos on Friday have many analysts believing Google may be serious about a U.S. wireless network.

"Google on a relative basis, is starting to look quite cheap," Lindsay said. "But investors are hanging back. They want to find out if Google intends to bid to win in the wireless auctions."