Sheldon's comments on valuation would be interesting if only they were right. As of the most recent quarter, Yahoo had cash and unconsolidated assets (mostly Yahoo Japan and the soon to IPO Alibaba) of roughly 13B or $8.90/share. As such, Sheldon's use of a P/E multiple on consolidated numbers is incorrect if understandable. If you back out these other assets, the company is trading at under 10X EBITDA and at a 6%+ FCF yield. This is for a company that WILL grow, despite some one-time items like the loss of the MSN relationship that masked growth this year. This is compared to radio, newspaper, and other old media companies that trade at similar if not higher EBITDA and FCF multiple - with leverage - that are shrinking. Online advertising is 8-9% of total advertising versus around 20% of total media time spent. Compare that to newspaper advertising at 18% of total versus only 9% of time spent. That divergence between % ad allocation and % media time (along with the better accountability of online media) has been driving the 20%+ growth of online advertsiing dollars. So let's say, Yahoo loses shares and only grows 15% a year. Given the fixed costs of its personel and techonology expenditures, earnings should grow even faster. Further, an investor is protected not only by a current yield of 6%, but by the fact that the company is underearning in search. From an input point of view, all searches are equal. A search on Google is no different than a search on Yahoo. However, Yahoo's poor execution and leadership in search technology lead it to make half as much as Google on every search a user types in. If new management were to come in and outsource search monetization to Google, 40% of the company's revenues would double at nearly 100% incremental margins. Earnings would about double. And capex would be cut at least in half. As such, the current FCF yield would be in the teens. All that said, the company has failed to operate well and most people understandably fail to account for the significant margin of safety in the unconsolidated assets, the net cash, the current free cash flow yield, future growth, and the potential upside from underearning assets.

Postscipt: So with the market screaming ahead after the Fed cut the prime rate by 0.5% Yahoo is up almost nothing...a paltry 11 cents at the close. There must be a few folks out there starting to agree with me.

Seth,
You make some fine points but ignore many. You ignore huge amount of assets on the intangible line. You tell us, if they would do this and if they would do that...BUT THEY DON'T. I acknowledged that to those willing to "speculate" (you) there might be something here. And you ignore they invest their capital like school children.

Why exactly do intangibles matter here? Your entire argument was based off a flawed earnings multiple - not an asset value. Intangibles are merely a byproduct of GAAP accounting; in of themselves, their economic significance bears no resemblance to the number carried on company's balance sheet. A company with no GAAP intangibles could actually have significant 'economic' goodwill, whereas a company with a large amount of intangibles garnered from pricey acquistions could actually have none. (See your "pal" Warren's old essay on See's Candy and Goodwill accounting). The point is that it doesn't matter. To illustrate, let's say you're right and we should write down the value of the company's intangibles. In such a scenario, we would expense the one-time write-off through the p/l as well as make an adjustment to shareholder's equity. Going forward, the company's amortization of intangibles would decline and the company would actually appear cheaper on the GAAP P/E mutliple you use. But as we both know, same business, no change. Its all accounting. The free cash flow will still be the exact same. Further, the net cash, the free cash flow yield, the unconsolidated assets all exist today. There is no may, might, or could. And you get the upside form improving search monetization for free.

Class dismissed.

Yes, lets suppose -

"we would expense the one-time write-off through the p/l as well as make an adjustment to shareholder's equity"

And that one time write off would be billions of dollars of shareholder equity...so says the class.

Last. Capital allocation. Again, you raise a valid if somewhat mistaken point. The ROE/ROA/ROIC's you mention need to be adjusted for their net cash (take out interest earned), unconsolidated assets (as carried on book), and make an adjustment for accounting illusions such as goodwill.

More simply, the company has consistently grown its earnings it the double digits. If it were actually earning a 7% ROE/ROA/ROIC, it would not have been able to self fund, which it has done and continues to do. Please sit down class. To illustrate, if a company retains and reinvests all of its earnings, the most it can grow is its return on equity. As such, we intuitively know, given Yahoo's double digit earnings growth, self funding, and growing cash pile (implying less than 100% reinvestment), that the core business must be earning double digit returns on equity. And this makes sense when we think about the nature of their business and the barriers to entry that exist in operating a major web portal.

All that said, some capital allocation decisions have been poor. The company is too eager to spend on acquistions compared to buying back its own stock at a discount. Some of the company's projects have been failures for no fault of their own and others they have botched. Either way, they have not thought or acted enough like owners, which is reflected in their egregious past options issuance you allude to. Hence the current reorganization. Sue Decker is a great leader and has begun making the right changes. It takes time, but you're being paid 6% plus growth to wait.

What would a Yahoo pricing explanation do for companies like Microsoft who have already made a more than generous offer to the giant web-based business? How are dollar figures calculated?

I think Microsoft should be doing what they know how to do, and do it good. Wasting time trying to figure out how to compete in all areas may be a waste of time and money........