• by Mark Walsh  @markfwal, March 19, 2008

Bullish financial projections released by Yahoo Tuesday could lead Microsoft to boost its original $44.6 billion bid for the Web portal, according to Internet analysts.

That was certainly Yahoo's intention in disclosing a plan detailing Yahoo's financial and strategic goals--initially presented to investors in December 2007--to back up its claim that Microsoft's proposed offer "substantially undervalues" the company.

Over the next three years, Yahoo expects to double operating cash flow to $3.7 billion from $1.9 billion and generate $8.8 billion in revenue excluding traffic acquisition costs. That represents a bullish 25% annual revenue growth rate in 2009 and 2010, and is well above Wall Street expectations.

RBC Capital Markets called Yahoo's three-year plan "aggressive." "We believe that the Microsoft/Yahoo deal ultimately goes through, and that today's argument could push Microsoft to sweeten its bid to avoid a hostile takeover which may alienate Yahoo employees," wrote RBC analyst Ross Sandler, in a research note issued Tuesday.

As a result of the report, RBC upped its price target to $32 a share from $24, "to reflect the potential acquisition."

Similarly, Henry Blodget of the Silicon Alley Insider blog surmised that the Yahoo presentation "should give Yahoo leverage to extract at least a couple more dollars per share out of Microsoft." Yahoo is said to be looking for at least $40 a share, well above Microsoft's $31-a-share offering. Yahoo's Board of Directors formally rejected the Microsoft bid in February.

Both Sandler and Blodget agree that Yahoo lays out a very optimistic scenario in its outlook, ignoring a looming recession. "If the overall economy and the online advertising space were in a healthier place right now, we would have more confidence," wrote Sandler. "At the very least, this is a smart, last-ditch effort by Yahoo management to squeeze a few more dollars."

The RBC report also questions why Yahoo hasn't updated the plan since December in light of "recent macroeconomic issues."

Investors appeared less skeptical, as Yahoo shares climbed about 7% to $27.71 on Tuesday in response to the company's financial projections.

In the presentation, display and search advertising are cited as especially strong revenue drivers--adding $1.9 billion and $1.4 billion, respectively, in revenue in the next three years.

RBC found that Yahoo's annual growth estimates of 24% for search and 19% for display ads assumed "meaningful share gains" in search from Project Panama, as well as in display, and in faster-growing international markets.

The presentation highlights Yahoo's "must buy" initiative for advertisers, rolling out stats showing its traffic leadership in areas such as personal home pages, "starting points" like news, finance and sports, and mobile.

It also touts Yahoo's efforts to make it easier and more efficient for advertisers to buy inventory on its various properties. Among the latest efforts is its new Web-based "Advertiser-Publisher Exchange," or Apex, intended to simplify ad placement across all platforms including search, display, video and mobile, with both auctioned and guaranteed inventory.

At the international level, Yahoo emphasized its strength in Asian markets through market-leading properties such as Yahoo Japan and the Alibaba.com business-to-business marketplace in China. Yahoo maintains that its stakes in these Asian Web sites (put at $12.6 billion) are not typically factored into estimates of its overall value.

That gripe was reflected more broadly in the Yahoo presentation where it stated: "We believe our growth and profitability prospects are not fully appreciated by the public markets." After its modest stock gain Tuesday, the company may feel a bit more appreciated.