Yahoo! to Build Bigger Bomb Shelter
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Written By Kew Kelly-Yuoh | October 17, 2006 | Share This
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You’d think the sky was falling given some of the headlines surrounding Yahoo!’s latest earnings release. From Marketwatch.com, “Yahoo profit falls 37%; net sales up 20%” and from MercuryNews.com “Yahoo earnings off 35%, but meet estimates.” It is, of course, flavor of the month to rag on Yahoo! given perceived sluggishness in getting anything done, but leading with this quarter’s earnings decline really is meaningless given that:
- Yahoo! preannounced all the information anyway and
- Yahoo! is using different accounting methods for expensing options this quarter vs. the quarter a year ago.
Restating the latter point, if you’re going to calculate a percentage delta, i.e. X/Y-1, and X and Y are apples to oranges, what’s the point?
Which brings me to one of my pet peeves, the concept of expensing options using the fair value method or Black-Scholes, probably the biggest load of crap accounting calculation forced upon companies post Enron by people who know next to nothing about statistics. Black-Scholes is incredibly sensitive to the volatility input, which is, not only, notoriously difficult to validate (as opposed to the actual calculation which is simple), but it assumes price deltas are distributed normally. Of course, price deltas are not distributed normally, and thus volatility (particularly for a stock such as Yahoo!) doesn’t even converge to a value over any period of time.
But lest we go down that rabbit hole too deeply, reading through Yahoo!’s earnings release the biggest concern is actually the Company’s $3 billion stock repurchase program. Yes, there are various caveats as to when Yahoo! will buy its stock back, e.g. five year timeframe, market conditions, share price and other factors, but Yahoo! is essentially saying its stock is a better investment for $3 billion of the Company’s hard earned cash than anything else out there including new business initiatives, acquisitions, strategic partnerships, etc. A stock repurchase is something I expect from a mature company, not Yahoo! who is in the throes of competing with Google amidst the ballyhooed Web 2.0 explosion. Seems Yahoo! is focusing too much on the ticker tape and not on executing quickly, maybe they should invest $3 billion on getting Panama out the door.
Topics: Yahoo! |