Yahoo, Google & Web 2.0 Reality Check

Not such a good day for Yahoo and other search engine stocks. Yahoo’s modest financial performance in the fourth quarter of 2005 prompted a quick sell-off, and already the second largest search engine is down 10% for the day. Suddenly there is growing anxiety about Google and the whole “internet advertising thing.” Some analysts have already started the bear talk on Google. There is belief that Yahoo’s weaker than expected earnings are prompting a sentiment shift on the search stocks – from positive to less than positive. Canary in the mine, as per Joseph Weisenthal stock options and their cost,

Check how much Yahoo! will be spending on stock options in 2006, according to the guidance they gave yesterday it’ll be somewhere in the ballpark of $420-$450 million. That compares to a mere $52.4 million in 2005, an enormous increase.

We got to wait for Google’s numbers; and I bet they will be just fine. Unlike Yahoo, Google is highly focused on advertising sales, and despite its occasional new product the company knows which side of the bread is buttered. I think their decision to buy dMarc yesterday was proof that Google is only about advertising.

The big question is if Yahoo (and Google) stocks do continue to take a pounding, then what it does to the Web 2.0 start-ups. The falling stocks bring shopping sprees to quick halt. Given that GYM(IAA) is the only exit, one wonders about the future of these tiny tots.

Jason Fried offers some advice: “Believe it or not, it’s far better (and easier) to build a small, profitable, healthy company that sells a product or service to a thousand small customers than it is to sell to that one magical big buy-out customer.”

PS: Where is Paul Kedrosky when you need him?