Yahoo! Earnings Beat Forecasts

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CBS/The Early Show
Yahoo! reported third-quarter earnings and revenue that smashed analysts' expectations Wednesday, raising hope the Web powerhouse will give beleaguered Internet stocks a much-needed shot of adrenaline.

Yahoo! (YHOO) reported third-quarter sales of $53.6 million and profit of $16.7 million, or 15 cents a share. The company had been expected to post a profit of 9 cents a share, according to the analyst consensus estimate compiled by First Call.

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The bullish report from Yahoo!, based in Santa Clara, Calif., comes as little surprise to observers, who note the company's record of beating expectations by a wide margin.

Investors' reaction, however, won't necessarily be so positive if the follow-up on its previous earnings report is any indication. Last quarter, Yahoo's stock sold off after results were released, and investors seem to be confused about how to play the new report, said Scott Ehrens, an Internet analyst at Bear Stearns.

In after-hours trading on the heels of the latest report, shares of Yahoo! rose to 116 1/2 vs. a closing price of 114 3/8, suggesting an early rise may be in store Thursday.

Yahoo's results could come as a huge relief to the Internet sector, which hasn't been able to shake increasing concerns that crumbling foreign economies could lead to a recession in the U.S. sometime in the next year. Most Net stocks remain 25 percent or more off highs reached over the summer.

On Tuesday, it got even worse when SportsLine USA (SPLN) earned the dubious distinction of being the first new media company to disappoint Wall Street. SportsLine, which saw its stock plunge 53 percent, said third-quarter sales would came in under analysts' expectations. At the same time, Yahoo! shares fell 8.4 percent.

Yahoo's latest results certainly raised expectations that its now-familiar ability to deliver good news "may be able to stop the bleeding in the sector," said Ryan Jacob, portfolio manager of The Internet Fund.

Some investors may question whether Yahoo! is worth more than 80 times its revenue for the past twelve months, but Jacob is stll a fan. "I can't really see what's going to slow them down," Jacob said, noting the company's high gross margins, which stood at 90 percent in the third quarter.

Like most Net companies, Yahoo's earnings potential is being vastly underestimated by the analysts who follow the company, said Jacob, whose fund was up 61 percent at the end of third quarter but has taken a hit since then..

This cautious approach has been going on for a while and has boosted the stock performance of companies like Amazon.com (AMZN), he said. "I look at the reports from a year ago and I have to laugh," he said. "There's only so far [the sell-side analysts are] going to go out on a limb."

Even David Simons, managing director of research firm Digital Video Investments and generally a bear on Internet stocks, admitted Yahoo!'s business fundamentals look solid. In September, the company upped its operating margin targets for the first time since the company went public.

"Coming from Yahoo, you have to take them seriously, because they haven't been ones that tended to boast," he said.

Bear Stearns' Ehrens said Yahoo stands to benefit as more and more advertisers concentrate their money on the biggest of the big. "The largest companies are getting a disproportionate share of the rewards and the small companies are challenged," he told CBS.MarketWatch.com.

In September, traffic on Yahoo's Web properties grew to 144 million page views per day, compared to an average of 115 million page views a day in June.

Written By Darren Chervitz