NEW YORK (CNN/Money) - Yahoo! Inc. is expected to report a quarterly profit Wednesday, compared with a loss last year, but opinions are mixed about the strategy the Internet media company used to achieve its recent return to profitability.

Some company watchers are convinced that Yahoo!'s efforts to reduce its dependence on online advertising will continue to yield solid results, and they expect Yahoo! executives to provide a more upbeat business outlook for the coming quarter, which for most tech outfits is expected to be lackluster at best.

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Others are more skeptical, suggesting that the company's recent growth spurt is merely a short-term blip on an otherwise flat growth line.

"I expect the tone of the conference call and the guidance they give to be more positive than investors expect," said Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray.

"Yahoo! is still seen as heavily dependent on advertising, and since there is no clear recovery in the ad market yet, people aren't getting excited about Yahoo!," Rashtchy added. "In reality, Yahoo! has diversified outside its core advertising market, and growth there will help it grow the top line nicely."

U.S. Bancorp Piper Jaffray has an "outperform" rating on Yahoo!, and the firm does not do any investment banking business with the company.

At the same time, Derek Brown of W.R. Hambrecht, who has a "sell" recommendation on Yahoo!, argued that while the company has made substantial progress over the past year and a half, its diversification efforts have not been enough to offset the ongoing weakness in the company's core business.

"The online advertising market still seems to be struggling," Brown said. "It's difficult to look at that and see substantial near-term growth."

Yahoo! is not a W.R. Hambrecht investment banking client.

When they reported the company's second-quarter results in July, Yahoo! (YHOO: Research, Estimates) executives said they were aiming for third-quarter revenue ranging between $225 million and $250 million. During last year's third quarter, Yahoo! logged revenue of $166.1 million.

Company watchers generally are expecting Yahoo!'s third-quarter revenue to come in near the middle of its targeted range, at roughly $239 million, suggesting a 43.8 percent year-over-year increase, according to a survey of 14 Wall Street analysts conducted by First Call.

By First Call's count, Wall Street is generally expecting Yahoo!'s third-quarter profit, excluding restructuring and other one-time charges, to come in at 4 cents per share. That would compare with an operating loss of a penny per share during the year-ago quarter.

If Yahoo! makes its numbers, it would mark the second consecutive quarter in which the company logged an operating profit after running a deficit for six quarters in a row.

Although it is considered by many to be a dot.com bellwether, Yahoo!'s recent performance does not necessarily reflect broader industry conditions. Though some industry analysts recently have suggested that the online advertising market has stabilized somewhat, there are no clear signs that a rebound is on the horizon.

In fact, early last month, executives of AOL Time Warner lowered their revenue and profit forecasts for the company's America Online Internet unit, pinning the blame on lower-than-expected online advertising sales. AOL Time Warner is the parent company of CNN/Money.

While online advertising sales still account for the bulk of its revenue, Yahoo! has been moving to diversify its revenue stream. Under Terry Semel, who took over as Yahoo!'s CEO in April 2001, the company has taken a number of concrete steps to diversify its revenue stream.

Among those has been: a revenue-sharing agreement with pay-for-placement search-listing provider Overture Services Inc.; the purchase of HotJobs.com; and building up its portfolio of premium consumer services as well as charging for certain consumer services it once provided free.

Some observers also point out that Yahoo! may have benefited to some degree from instability at America Online, which in addition to the continued softness in the online advertising market has been caught up in a federal probe of its accounting practices and has had a series of shifts in senior management.

"We believe the recent turmoil at AOL is probably helping Yahoo!'s online advertising business on the margin," Merrill Lynch said in a note to clients Tuesday.

Merrill, which lists Yahoo! among its investment banking clients, in July upgraded its rating on the company's shares to "neutral" from "sell."

Another part of Yahoo!'s broader strategy is becoming a provider of Internet access as well as content. Through a partnership with SBC Communications (SBC: Research, Estimates), Yahoo! last month began offering high-speed Internet service. The idea, which puts Yahoo! in more direct competition with likes of America Online (AOL: Research, Estimates) and Microsoft's (MSFT: Research, Estimates) MSN Internet service, is to attach other products and services to its access service.

Under the terms of their deal, SBC Communications will pay Yahoo! $5 a month per subscriber, while Yahoo! in return gives SBC a percentage of the premium services it sells. Already, Yahoo! had begun offering an online gaming service in connection with the new broadband offering, and the company is expected to unveil more new services in the coming months.

How Yahoo!'s foray into the access market will turn out remains an open question, and its impact on revenue and profits in the near term is expected to be limited.

And popular opinion on Wall Street remains split. Of the 21 brokerage firms that rate Yahoo!, two have "strong buy" recommendations, nine rate the stock a "buy." At the same time, eight firms rate Yahoo! a "hold," while one recommends investors "sell," and another views the stock as a "strong sell."

At issue is whether the company's shares are fairly valued in light of its recent return to growth and its prospects moving forward.

Yahoo! shares have fallen 24 percent over the past month, under-performing the Goldman Sachs Internet index, which lost 15 percent of its value during the same period. At current levels, Yahoo! shares are trading at about 44 times its forecast earnings of 21 cents per share for 2003.

The more optimistic analysts point out that Yahoo! has been showing year-on-year growth in revenue, while many of its peers have been logging revenue that is either flat with or declining from year-ago levels. They also point out that at current values, Yahoo!'s stock trades at a discount to many of its peers.

On the other end of the argument lie concerns that Yahoo!'s recent reported growth has been somewhat deceptive because acquisitions and new partnerships that did not exist a year ago have accounted for most of it.

"When you strip out those acquisitions and new partnerships to really get a sense of what the company's core business is doing, it really struggled through the first half of the year," said W.R. Hambrecht's Brown.

Brown said he also is concerned that the roll-out of Yahoo!'s access partnership with SBC Communications was slower than had been expected, making it unlikely that the company will reach its revenue objectives for that business unit.

Considering Yahoo!'s current market capitalization of more than $5.6 billion, the company's valuation is still too high and not reflective of its fundamentals or near-term prospects, according to Brown

"Those are some fairly significant issues to overcome, particularly when looking at a market cap of that magnitude," he said.