Jordan Rohan is a financial analyst who specializes in internet stocks. His consistent track record in calling the ups and downs of search companies makes his thoughts and insights well worth attention.
Rohan, a managing director of equity research for RBC Capital, was one of the keynote speakers at the Media Post Search Insider Summit held in Keystone Colorado on July 20th. He offered some intriguing insights into the search space, based on deep analyses of business models bolstered by wide-ranging research and extensive contacts with key players in the industry.
The timing of Rohan's presentation was auspicious: Both Yahoo and Google had just reported record second quarter results, with very different reactions from the stock market.
Yahoo announced that quarterly revenue was up 26% compared with a year ago to $1.58 billion. However, net income of $164 million was down 78% compared to last year, but that included a $500 million investment gain, including sale of the company's Google stock.
Google, on the other hand, reported revenues of $2.46 billion for the quarter, an increase of 77% compared to the second quarter of 2005, with net income of $721 million up from $342 million a year ago.
Shares in Yahoo plunged by more than 20%, while shares in Google declined only slightly on the earnings news. "There are very few companies in the world that can have a couple billion in revenues and grow 80%," said Rohan, noting that Google's market capitalization now exceeds the value of all other publicly traded internet stocks combined.
Part of this dominance is because Google keeps growing, but this year has also been a terrible year for other internet companies as their market caps have declined. "This is an amazing force, and one that anyone not working for Google has to watch," said Rohan.
However, he cautioned that it's important to differentiate between stocks and companies. "The job of an analyst is not easy," he said. "We have to identify stocks that are good, not necessarily good companies."
"Yahoo is a stock and company that's facing the biggest challenge of its life. Yahoo is a media company at its core, and a very good one."
However, the company committed "a cardinal sin of stock maneuvers," promising delivery of its revamped "Panama" search advertising platform and then delaying its release. Calling this "Panamawful!", Rohan said "that's a hit to management's credibility." Investors want an immediate catalyst in the next 90-180 days, and now the expected release of Panama is 270 days away. Panama won't help Yahoo the company in 2006— and that makes Yahoo's stock fundamentally undervalued, Rohan concluded.
"The only real cure for a lack of credibility is getting a product out there and proving that it works," he said.
Rohan foresees many of the larger players in the search space continuing to acquire "bit sized" smaller companies—and not all of those acquisitions will be successful. "Big media companies can tolerate a 600 million bad acquisition," he said.
Rohan thinks that Yahoo and eBay are "slow dancing" with partnership. "I think they'll merge at some point in the next three years. That's a hunch," he said. "I think the addition of eBay to the affiliate network of Yahoo will entirely offset the loss of MSN," referring to MSN's decision to build its own algorithmic and search advertising platforms rather than sourcing both from Yahoo as it had done previously. "If that's the case, then Yahoo can't live without eBay."
International markets will also "provide an element of surprise" to the performance of the major search companies. "These international markets are absolutely the most important markets for the future," said Rohan. "As interesting as the growth path is in the U.S., international growth is going to matter more than anything to a stock."
Can Anyone Dethrone Google?
Rohan said that his analysis suggests that Google is more dominant than other ratings agencies, such as comScore, suggest. "The balance of power in the internet is now more skewed than I've ever seen it (since 1999). Google is more in the center of the internet today," he said.
Eventually, he said, Google's competitors will mimic Google well enough that they'll catch up. This will force Google to differentiate, and he thinks video will be a key part of that differentiation. He also said that Google's new Checkout feature is "transformational."
"Google will absolutely give you better inventory to target," said Rohan. "At the same time Google has mechanisms in place that will raise bid prices. Google is absolutely capitalistic in its maneuvers. They care almost as much about revenues as they do about relevancy," he said.
What can cause the company to fumble? "Google's greatest risk is that they mobilize the ad community to be so angry at them that they move advertising funds away from them," said Rohan.
Even still, he thinks it's going to be a challenge for Google's competitors to take mind and market share, noting that it usually takes a 3X improvement in a product or service to make users move away from an entrenched leader.
"It's almost unheralded—there's no switching cost, so the amount of loyalty that consumers are showing to Google is unbelievable," said Rohan. "My guess is that whoever ends up toppling Google someday is a company that may not exist today."