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Why Not to Follow George Soros Into Yahoo


It's the information deficit that should give investors reason to pause before diving in.

Is something brewing at Yahoo (YHOO)? And what? The Internet stock is still struggling to find a way to grow while competing with Internet giant Google (GOOG) -- no changes there. Meanwhile, Yahoo shares have basically done nothing for investors through tech rally, starting the week at the same price they were back in June. There's just not a lot to get excited about.

But get this: Billionaire financier George Soros has been quietly snapping up Yahoo stock in recent months, tripling the size of his position from 726,000 shares to 3.5 million. Mr. Soros, known for his Midas touch, is one of the few hedge-fund bosses to rack up gains in 2008 and 2009. So some investors will no doubt copy his Yahoo investment.

It's mighty tempting to follow Soros into the high-stakes action. But I just don't see why you should.

I hate to sound like a grump, but it's becoming harder and harder to see the overall need for the kind of one-stop-shop Internet portal that Yahoo provides. Consumers are getting sophisticated about how they use the web, spending more of their time on places like Facebook, Twitter, and now Google Buzz. Yahoo's email and instant-messaging businesses or entertainment and news offerings are still popular, but a lot less popular than in the past. As a result, advertisers are relocating elsewhere online.

This reality is coming through in the numbers. Yahoo's core business just keeps on shrinking: In the most recent quarter, total adjusted revenue fell by 5%. Owned and operated search revenues plunged a whopping 15%. Despite monstrous cost cuts, Yahoo's free cash flow was flat year over year.

Judging by market metrics, it's hard to see where promised growth is going to come from. While Google and Microsoft (MSFT) saw queries for their search engines grow by double digits in January, Yahoo's queries fell by 8.9%. If Yahoo hopes to benefit in a meaningful way from its Microsoft search partnership starting in 2011, it had better come up with a way of stabilizing its search market share -- and quickly.

It's the information deficit that should give investors reason to pause before diving in. When it comes to Soro's motivations, there's almost nothing to go on. What does he know about Yahoo that we don't? What hopes does he see in a company that by all appearances is spinning its wheels? Until more information is in the public, it's probably best to leave those billion-dollar questions to the billionaires.
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