After markets close today, Yahoo Inc. (NASDAQ: YHOO) is expected to meet or beat the consensus EPS estimate of $0.14 and the revenue estimate of $1.16 billion. After Google Inc. (NASDAQ: GOOG) reported lower-than-expected earnings on soft advertising rates, Yahoo, which depends on display ads for revenues, is expected to post solid profits even if revenues don’t rise much.
A more optimistic result is expected from Amazon.com Inc. (NASDAQ: AMZN), which yesterday reported burgeoning sales of its Kindle e-reader. Amazon responded quickly to competition from Apple Inc.
(NASDAQ: AAPL) and its iPad by lowering prices for the Kindle from $259 to $189 last month, and that tactic appears to be paying off.
Yahoo’s 10-year agreement with Microsoft Corp. (NASDAQ: MSFT) earlier this year on search technology and advertising revenue was widely viewed as a win for Microsoft. Essentially Yahoo is paid a portion (88%) of the revenues Microsoft gets from searches on Yahoo sites. Yahoo search results now say “powered by Bing”, and Microsoft gets the right to integrate Yahoo’s search into Microsoft’s own search platforms.
For all practical purposes, Yahoo is a subsidiary of Microsoft and continues to exist on its own at Microsoft’s pleasure. Some analysts like this arrangement enough to put a target price of $22 on Yahoo shares. That would be great, given that shares are currently trading around $15. It’s not so great when shareholders recall that Yahoo turned down $33/share from Microsoft in May 2008.
The consensus estimates on Amazon are EPS of $0.55 on revenues of $6.55 billion. One of the questions that comes out of yesterday’s announcement that the company is now selling more e-books than hardcover books is, “What does that do for revenues and profits?” For the past three months, Amazon has sold 143 e-books for every 100 hardcovers it sold, and for the past 4 weeks the ratio rose to 180:100.
The catch is that e-book sales account for just 5% of Amazon’s annual sales, according to a Citigroup analyst, and the company books just 30% of the price of an e-book with the rest going back to the copyright holder/publisher/author. That deal started July 1st. Prior to that, Amazon kept 65% of the purchase price, and that is the number that will determine the second quarter profit.
In order to impress with its better Kindle sales and the growth in its e-book sales, Amazon is going to need to hammer estimates. Beating by a few pennies won’t help the share price.
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