Do you Yahoo?

Yahoo's stock continues to slide as it faces questions about its growth strategy. The GooTube (Google + YouTube) combination did not help me Yahoo!

Google's execution is perfect, I think they will leverage the video content and brand equity of YouTube as part of their growth strategy. Despite Mark Cuban's perspective that the legal eagles will be circling the company for purveying pirated video content, I believe that Google will figure out a way to stave off these potential problems. Google realizes that online video + advertising is a powerful concoction. It is not just about showing pirated shows of John Stewart or your favorite episodes of CSI. It is also about promoting the advertisements of a small-business owner who bakes cookies, partnering with Zagat to show videos of restaurants in different cities, or reality advertising ala "American Idol" style to review and rate different ads. I think Google has several options.

What puzzles me is why Yahoo didn't make the move? Did Mark Cuban freak them out with his legal take on YouTube? After all, Yahoo bought broadcast.com from Mark.

So, should Yahoo do a "YahooBook" i.e. a Yahoo + Facebook merger? IMHO, I think Yahoo should not jump into a merger merely to please Wall Street.

As Terry Semel, Chief Executive of Yahoo mentioned in the conference call, Yahoo needs to "get back to basics". Yahoo's growth impinges on its ability to enhance content, ensure that "Panama" its advertising strategy remains on track. Despite Yahoo's travails, investors should realize that Yahoo is the granddaddy of the .com era. Although, Google is the leader in on-line advertising with a 25% market share, Yahoo commands about an 18% market share and sales have risen by 20% in the 3rd quarter of 2006 compared to the same period in 2005. With a projected revenue of between $4.48 and $4.60 billion for 2006, Yahoo's growth strategy depends on a "laser-focused" attitude towards ad-revenue generation capability.

I like their acquisition of AdInterax, a provider of online advertising services and shareholders will be pleased to hear the authorization to repurchase $3 billion of common stock over the next five years.

Yahoo's P/E of 18 is less than that of these overpriced retailers such as American Eagle Outfitters (AEOS) and UnderArmour (UARM). Who would have thought .com companies would be cheap on a P/E basis back in 1999? (Didn't they come up with the Price-to-Click metric or something like that.....simply ridiculous....) I guess the old adage...what goes around comes around....stays.

So, is it time to Yahoo?

I would wait for the dust to settle and consider the following:

• A vertical bull spread for January 2009. Sell the January 2009 $30 call (@ $3.2 per option) and buy the January 2009 $25 call (@ $4.9 per option). This would have a net cost of $1.7 (no commissions included)

If Yahoo stock is $30 at expiration in January 2009, the net profit in this strategy would be $3.3 ( $30 - $25 - $1.7) i.e. a 194% return in 2 years. So, if you invest $10,000 in this strategy it would give you a profit of $19,400. :-)

If Yahoo stock finishes below $25 at expiration in January 2009 then the maximum loss is $1.7

Disclosure: At this point I don't own any Yahoo calls but I have Yahoo on my watch list.