By Chad Brand of The Peridot Capitalist

Shares of Yahoo! (YHOO) are falling 5 percent in after-hours trading tonight after the company reported first quarter earnings of 10 cents per share, a penny below analyst estimates. If you are an investor in the company, here are five reasons to sell your stock.

1) They are overhyping Panama

CEO Terry Semel and company have been hyping their new ad platform, Panama, ever since it launched. Yahoo! stock has risen 25% so far in 2007 mostly due to the fact that it appeared the new system would really boost results. With first quarter profits below expectations and second quarter guidance in-line with projections, it appears they are overhyping Panama’s potential and any benefits from it are clearly priced into the shares already.

2) Growth in the U.S. is over

I was amazed when I saw this figure in their press release. Revenue in the United States for the first quarter was $1.1 billion, growth of zero percent over 2006. This should be a red flag. It’s true that international market opportunities trounce those domestically, but Yahoo! stock is selling for prices that reflect a high growth Internet leader. With no growth in the U.S. it will hard for the company to deliver superior results going forward.

3) Their time has passed

There was a time when Yahoo! was hot. Those days are over. Their email is still popular and I pay them 20 bucks a year for their fantasy sports program, StatTracker, but Google is eating their lunch in search and other properties Yahoo! bought a long time ago to diversify out of search (HotJobs, etc) just are not going to be growth engines. They just can’t stand out from the crowd anymore.

4) Google is eating their lunch

When Google reports first quarter numbers on Thursday, you won’t see U.S. growth anywhere near zero. Google has taken over Yahoo!’s leadership position in search and internet advertising and has the cash stockpile to continue to innovate and grow faster than Yahoo! can. There is certainly room for more than one player in this market, but without major changes at Yahoo! it is hard to see how they will reinvent themselves.

5) Google shares are cheaper

This is best reason of all to sell the stock. Google has the momentum, more growth, more resources, and amazingly, a cheaper stock!  Google shares trade at a 2007 p/E of 33, versus 59 for Yahoo. Why not just sell your Yahoo! shares and buy Google? There is more growth potential and even if you believe the potential to be a little overhyped, you are paying a lower multiple of earnings to get a faster growing business anyway.

Full disclosure: Long Google and short Yahoo! at time of writing

http://www.peridotcapitalist.com/

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