Yahoo! and the “Visible” Hand

What is the problem with Yahoo!? Here is the main answer provided today on CNBC by Andrea Williams Rice, an Internet analyst for Deutsche Banc Alex. Brown: The problem is a lack of “visibility.”

As you have probably heard, Yahoo! announced yesterday evening that its revenue and profit numbers are coming in far lower than expected and that its celebrated chairman and CEO, Tim Koogle, is stepping aside from the latter position. A search to fill that role is now underway. “Lack of visibility,” then, means that there’s no way of knowing what’s going to happen. Yahoo!, in other words, is at the mercy of larger, unknowable forces, such as the health of the overall economy and the skills of whoever the new CEO might be.

Lack of visibility is an increasingly popular concept, but the thing it describes is not new at all. There was a rather extreme lack of visibility this time a year ago when Yahoo was still a “company you could go to sleep at night not worrying about,” in the words of another Internet analyst, Paul Noglows of J.P. Morgan H&Q, quoted in today’s Times. Going to sleep at night and not worrying about Yahoo! was in fact possible because of the lack of visibility: No one knew what was going to happen. If they did, they would have issued sell recommendations strong enough to inspire a few sleepless nights. Oh, it might not have seemed like there was a lack of visibility, but if there was an analyst out there with enough visibility to see that in 12 months Koogle would feel the need to bring in another top executive, that his company’s net and revenue numbers would decline, and that YHOO would fall from $205 a share to around $17, I don’t remember hearing about it. In that case, it was the rather spectacular lack of visibility that made it possible to sleep soundly on a pile of YHOO—not thanks to certainty about the future, but thanks to ignorance of it. Stocks, you see, are always at the mercy of larger, unknowable forces.

No one ever quite described it this way, but in a sense it used to be the companies with the least visible futures that were the most popular. Big, lumbering blue chips were for punks, precisely because they were so boring and predictable. So dully visible. It was the fast-growing up-and-comers that attracted all the attention, and the lack of visibility—or the “vast upside potential,” as the difficult-to-predict future was described in this context—is what made them so hot.

Maybe you believe that Yahoo! (currently valued at around $10 billion by the market) still has vast upside potential and will one day, in a healthier economy and an increasingly Net-centric world, be a massive juggernaut worth as much Disney ($60 billion) or AOL-Time Warner ($195 billion). Or maybe you don’t. Either way you have the same pesky lack of visibility to deal with. One option is to wait until things get more visible, but the problem with that is it never actually happens until after the fact. (Remember: The state of Yahoo! circa March 2001 is much more visible today than it was in March 2000.) But what if you want to make your decision now?

Well, in her CNBC interview, Rice opined that it is too early give up on Internet advertising generally, and when questioned, offered up no specific flaws in Yahoo!’s business model, which after all has made it into a $1 billion-plus (revenue) company. On the other hand, she described Yahoo! stock in terms that made it sound more or less toxic. I wish I could reconcile these two lines of thought, but there’s something preventing me from doing so—a lack of visibility, perhaps.