Monday, June 18, 2007

Bailing Out: eBay and Yahoo

From time to time, I like to mention stocks I like or don't like. In all cases I will tell you whether I own the stocks (full disclosure). The stocks I am highlighting today - eBay and Yahoo - I do not own. Nor would I. These are two of the oldest internet properties and both have had their ups and downs, but lately, I see little to no upside, in terms of share price appreciation, for either of them.

Let's look at Yahoo first. Six years ago, they were the leaders in just about every measurable internet category. They had traffic, were the leader in search, news aggregation, games, etc. Then along came Google and stole their search crown. Other competitors sliced away at other categories. And while Yahoo still has impressive traffic numbers, they lack what every great internet company needs - innovation - and that's why their profits and share price are down.

Yahoo is exploring partnerships and integrations with local newspapers to improve the ad spending and reach in major local markets. This is a strategy that has great potential to backfire. Local ad spending on the 'net is the last great frontier, as yet unexploited by the giants. But large, clunky local newspapers, which have been slow to adopt best practices regarding their web offerings, while established entities, may not be the best prospects for innovative ad deals.

There's that word again. Innovation. Many of the largest chains of newspapers have been slow on the uptake and are still, like it or not, tied to the big bucks in print ad sales. The old tree-killing, mash-to-pulp-to-print mantra still resonates in newsrooms and ad departments across America. Teaching the old dogs of newspaper ad sales new tricks is going to be challenging, and likely unprofitable for some time to come, if ever. Ad reps at large newspapers have entrenched customer bases, many of them are in their 50s or 60s and make six-figures, so they're a tough bunch to crack. Why should they offer internet ads to their big-time clients? If it ain't broke don't fix it.

Yahoo would do better to seek out new internet-only local entities, like bloggers, wikis and ultra-local small websites. But they're stuck in that "bigger-is-better" corporate mindset, and that's yet another reason they're in failure mode.

Local ad markets represent some of the most fiercely-fought-over turfs in any selling regimen. Yahoo is in for a long, tough fight in which the landscape shifts from market to market and sometimes day to day. Good luck. It's a losing battle for both the newspapers and Yahoo. In the innovation war, they've come to a gunfight with a switchblade.

Just as i was finishing up this entry, Yahoo announced that CEO Terry Semel is stepping down and will be replaced by co-founder Jerry Yang. Leave it to Yahoo. News about their own company, and they get scooped by CNN Money. I'll stand by my prediction for short term gloom, however. This company needs more than a face-change at the top.

As for eBay, I'll just keep it simple. If it wasn't for their purchase of payment processor PayPal back around 2002, they'd be sunk lower than they already are. The company has made various large acquisitions that don't seem to offer much synergy. Take Skype, for instance. What good does a free long-distance telephone service offer a company that depends on online retail sales for 60% or more of its revenue?

If you're scratching your head on that one, you're not alone. Analysts, merchants and users of the big, fat internet auction shopping site are still trying to figure that one out.

eBay had made other questionable calls on acquisitions and they seem to have lost their focus, if they ever had one in the first place. It's almost as though they feel that the online auction format is not sustainable long term, and maybe they're right. They haven't made the one fundamental change to the auction format that could change the paradigm - taking the time element out of the auction. Most offerings on eBay languish for days before getting bids in the final minutes or seconds, if at all.

The chiefs at eBay haven't noticed that they could make more money with a better, more exciting user experience in the company's 10 year history. Already this summer, listings are down on the flagship US site. It bodes evil for the future of the auction king.

Once again, failure to innovate plagues this company as it does Yahoo. The only advancements eBay has made over the years to their core product are bloated extras that have the potential to boost their bottom line. eBay is missing the web's new wave in very noticeable ways.

Currently trading around 31, eBay should languish in the 20s for some time to come and underperform the S&P 500 through 2008, or until there's a management shake-up.

Yahoo, already trading slightly below 30, may make it's way down to the teens by the end of 2007. They've offered nothing new for so long, major shareholders may begin to bail soon.

Now, today's markets: Dull. With a capital D. Get used to it. It's summer and these kinds of days are the norm. Volume was very light and the indices didn't budge far from the flat line, though they all closed on the downside.

Dow 13,612.98 -26.50; NASDAQ 2,626.60 -0.11; S&P 500 1,531.05 -1.86; NYSE Composite 10,005.47 -8.46

Declining issues lead advancers marginally, by roughly a 10-9 margin, but new highs still superseded new lows, 427-92.

Oil was up over $68... and $69, ending $1.09 higher at $69.09. They're out of their minds, these oil people, and they deserve to see everyone in America walk to work or take alternative transportation for two months. It won't happen, but they, the sheiks and the Big Oil execs deserve a fate much, much worse than death. They're raping the US economy, the world economy, and trying to rape Iraq and next, Iran. Brutal.

Gold and silver went in opposite directions, but not far. The metals are so dull, they are barely worth reporting. A timely strategy might be to sell all your precious metal holdings now and buy back in a year from now. These particular commodities have had their days in the sun and have been treading water for months. A major fall is coming soon.

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