|Searching for respect: Shares of Yahoo! have been stuck in a tight range even though sales and earnings are growing at a rapid pace.
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NEW YORK (CNN/Money) -
Internet stocks can hardly be called boring and predictable. But when Yahoo! reported better-than-expected third-quarter sales and earnings on Tuesday afternoon, Wall Street just shrugged.
Yahoo! posted sales of $932 million, excluding traffic acquisition costs or TAC, which is advertising revenue it shares with affiliate partners. That was 42 percent higher than a year ago and ahead of analysts' expectations of $917 million.
And earnings, excluding a one-time gain from the sale of investments, were 16 cents a share, nearly 80 percent higher than the same period last year and two pennies per share better than consensus estimates.
What's more, the Sunnyvale, Calif.-based online search and media company said that sales for the fourth quarter, excluding TAC, would be between $1.032 billion and $1.082 billion. That's roughly in line with Wall Street's forecasts of $1.06 billion. If Yahoo! hit the midpoint of its sales guidance, it would represent growth of 35 percent from a year ago.
Yet, shares of Yahoo! (Research), which fell about 1.3 percent in regular trading on the Nasdaq Tuesday, rose less than a percent in after-hours trading. And shares of Yahoo!'s top rival Google (Research), which is scheduled to report its third-quarter results on Thursday afternoon, dipped slightly after hours.
In a research note published following the release of Yahoo!'s results Tuesday, Piper Jaffray analyst Safa Rashtchy wrote that the quarter was "generally as expected."
But he added that year-over-year growth in the company's marketing services division (basically its online advertising business, which includes keyword search ads in addition to banners, pop-ups and other forms of online marketing) was about 46 percent, a bit lower than the more than 50 percent growth rate that the division has posted in previous quarters. So that may have disappointed some.
Martin Pyykkonen, an analyst with Hoefer & Arnett, added that the fact that Yahoo! didn't crush sales estimates may be leading some to suspect that Google won't be able to so either when it reports on Thursday. But he does not think this should be a concern for Yahoo! since the third quarter is typically the weakest for Internet companies.
"It seems like everything is in gear for Yahoo! There were no particular problems. But depending on what Google says about paid search on Thursday, it remains to be seen how investors will react to that," he said.
Nonetheless, Yahoo! continues to post strong increases in its fee-based businesses in order to lessen its reliance on advertising. The company owns the HotJobs employment listing site and also charges for services such as online personal ads, fantasy sports games and Internet access. The company has co-branded digital subscriber line (DSL) offerings with Baby Bells SBC (Research) and Verizon (Research) and announced an agreement with BellSouth (Research) on Monday to begin selling a DSL service next year.
The company reported a nearly 55 percent increase in fees during the third quarter. Fees accounted for 18 percent of the company's total sales, excluding TAC, in the quarter.
In addition, Yahoo! has taken steps to become more like a traditional media company. It launched an online music store in May and has lately added more unique content to its news sites.
Competition heats up
Yahoo!, like Google, has benefited from the surge in online advertising, particularly search-based ads. But competition for Web users is getting tougher.
Rupert Murdoch's News Corp. (Research) and Internet conglomerate IAC/InterActive (Research), run by Barry Diller, have both made significant investments in online media companies this year.
Microsoft (Research), which has recently revamped its own MSN search engine, is also emerging as a formidable challenger for Internet ad dollars. To that end, Microsoft, Google and Yahoo! have all been said to be wooing America Online, the Web portal and Internet service provider business of media giant Time Warner (Research). (CNN/Money is owned by Time Warner.)
MSN has been named in several recent news reports as being interested in a joint venture with AOL, which currently uses search technology from Google on its site. Google and Yahoo! are said to be interested in AOL in order to capitalize on the company's massive base of viewers at AOL.com, even though the number of dial-up subscribers for the AOL service has been in a steady decline for the past few years.
And last week, Yahoo! announced that it was going to make its instant messaging (IM) service compatible with that of Microsoft's. That move was widely viewed as a way for Yahoo! to remain competitive with Google, which is currently testing its on IM service known as Google Talk, as well as AOL Instant Messenger, the industry leader.
During a conference call with analysts, Yahoo! chairman and chief executive officer Terry Semel declined to comment when asked specifically about Yahoo!'s interest in AOL.
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Piper Jaffray has done investment banking for Google but Rashtchy does not own shares of the companies mentioned. Pyykkonen does not own shares of the companies mentioned and his firm has no investment banking relationships with them.
The reporter of this story owns shares of Time Warner through his company's 401(k) plan.