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Yahoo! spins web magic
The Internet giant gave cranky investors what they wanted. Is it enough to revive the stock?
April 20, 2005: 1:47 PM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - Yahoo! kicked off the Internet sector's earnings season Tuesday with strong evidence that recent jitters over the state of the online advertising market have been overblown.

Beating Wall Street estimates and raising guidance for the current quarter and full year was crucial for Sunnyvale, Calif-based Yahoo! The company's stock price has been hammered this year on investor worries over mounting competition in the booming Internet ad sector and concerns that the prices for "paid search," one of the fastest-growing segments of the on-line ad market, had softened.

Investors don't have much to worry about from the look of Yahoo!'s first-quarter income statement, which saw profits double on a 49 percent increase in revenues. The growth came from both the U.S. and overseas.

"It looks like a very strong beat-and-raise quarter," said Mark Mahaney, an analyst with American Technology Research. He noted that Yahoo! revenues from paid search -- a form of advertising in which sponsor links appear next to Internet search results and the advertiser pays only when a user clicks on its link -- was an especially strong business for the company.

Derek Brown, an analyst with Pacific Growth Equities, was also encouraged. "It's difficult to find any obvious weaknesses (at Yahoo!)," he said. "Based on these results, it seems clear that not only is the online advertising market and paid search market performing well, but that Yahoo! is knocking the cover off the ball" when it comes to profiting from the ad boom.

Yahoo!'s stellar quarter isn't all that surprising.

Advertising is by the far the company's biggest revenue generator. And Internet advertising is the fastest-growing form of advertising as major marketers gradually shift dollars away from traditional advertising such as broadcast television.

Estimates of market size vary, but JupiterResearch reports that online ad spending hit $8.4 billion in the United States in 2004 and will reach $16.1 billion in 2009.

Online advertising is still a small segment of the overall domestic ad market, which generated $158 billion in sales last year, according to ZenithOptimedia, a unit of the French ad agency Publicis Groupe. (Research)

Internet advertising takes on many forms, including banners, videos and pop-ups. Sponsored search accounted for $2.6 billion of last year's online ad market and is expected to more than double, to $5.5 billion in 2009, according to JupiterResearch.

Yahoo!, which sells advertising in all available formats, is one of the sector's biggest players.

Even so, Yahoo (Research)! stock has fallen nearly 14 percent since the since the start of the year. Shares of most Yahoo! competitors are also down year-to-date.

So what's spooking investors?

Investors are unnerved by the prospect of fierce competition for Yahoo! and other bidders for a piece of the growing Internet ad pie.

Yahoo, Google, and Microsoft are the three main players gunning for online ad market share. Each regularly rolls out new services meant to attract more Internet users and the ad dollars that follow them.

Other companies are also eyeing the market, including America Online and Ask Jeeves. CNN/Money and America Online are owned by Time Warner (Research).

Rivalries aside, investors also appear worried about recent reports that sponsored search ad rates were beginning to moderate.

Yahoo!'s rosy quarterly earnings, however, strongly suggest that the anxiety is unfounded.

"There were some concerns about paid-search pricing," said Pacific Growth's Brown, "but we observed no obvious changes in advertiser behavior during the quarter and that seems to be borne out by Yahoo!'s results."

Yahoo! executives, in a conference call with analysts after the quarterly numbers were released, gave no indication that they've seen a cooling in the online ad market.

"Yahoo! is off to a terrific start in 2005," said CEO Terry Semel. "We are in an excellent position to take advantage of all forms of advertising on the Web."

Yahoo!'s healthy earnings also bode well for arch rival Google, which dominates the paid search market and is due to report earnings Thursday. Google shares are down three percent year-to-date.

Of the six main players in the Internet search market, only shares in Ask Jeeves (Research) and Aquantive (Research) are trading above January 1 levels.

It's early yet, but investors appeared calmed by Yahoo!'s financial report.

Yahoo! shares surged nearly five percent within minutes of Yahoo's announcement that first-quarter revenues and profits topped analysts' forecasts.

Google's (Research) stock price jumped more than 3 percent after Yahoo! announced Tuesday afternoon.

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