Shares of the number two search engine have been in the dumps as Wall Street fixates on Google.
NEW YORK (CNNMoney.com) – Yahoo should count its blessings. It should consider itself lucky that it is allowed to even exist in a world gone mad for Google.
That, at least, is the way investors and techies seem to be thinking about the world's second largest search engine. Yahoo!, despite strong growth prospects thanks to healthy demand for online advertising, has been shunned by Wall Street for the past few months.
Since Yahoo! reported fourth-quarter earnings that were slightly below expectations and sales guidance for this year that disappointed investors, shares have plunged 22 percent.
Strong growth...but not as strong as Google.
Yahoo! is expected to report sales growth, excluding traffic acquisition costs (TAC), or revenue it shares with affiliate partners, of 31.6 percent from a year ago to $1.08 billion. Earnings are expected to dip about 15 percent to 11 cents a share.
Analysts say it's a bit misleading to suggest that Yahoo!'s profits are really in free fall. This year's first quarter earnings estimate reflects the fact that Yahoo! is accounting for stock option related expenses, which it did not do last year.
Adjusting for this discrepancy, Yahoo!'s earnings should actually increase by about 23 percent from a year ago to 16 cents per share, said Clayton Moran, an analyst with Stanford Group.
But unless Yahoo! reports sales and earnings that are significantly better than estimates, the stock could suffer since analysts are predicting even stronger first-quarter results from, you guessed it, Google.
Enthusiasm about Google's first quarter is a big reason why the stock, which also tumbled after the company reported fourth quarter earnings in late January that missed expectations, has recovered most of its losses from the past few months. Shares of Google are now down only 5 percent since its last earnings report.
"It will be a solid quarter for Yahoo! but it will likely not be enough to get the stock moving again," said Moran. "Yahoo! suffers by comparison to Google and in some respects it is for good reason. Google is gaining market share in search and I don't see that changing anytime soon."
Marianne Wolk, an analyst with Susquehanna Financial Group, said investors have already factored in the likelihood of Yahoo! meeting estimates for the first quarter. The more important issue, she said, is what's next for Yahoo!
"The question is less the current quarter results than the guidance for the second quarter," she said. Analysts currently are forecasting revenue of $1.14 billion, excluding TAC.
Wolk said that there are a couple of reasons why Yahoo! could have a challenging quarter. For one, this quarter tends to be seasonally weaker for search advertising. Wolk notes that Yahoo! will also soon lose a key customer, Microsoft's MSN.
Yahoo! had been providing MSN with sponsored-search results but this agreements ends in June. Microsoft (Research) is seeking to become a bigger player in sponsored search, selling advertising tied to specific keywords, with its new adCenter product.
Investors need a little patience
The company also finds itself losing the buzz battle. While Yahoo! has launched several new products during the past months, including a revamped travel search site and improved mapping features this week, Google gets all the attention for its latest offerings, such as its new finance and calendar sites.
Analysts say part of the problem for Yahoo! is that Google is a younger company that has just recently started to roll out features beyond search.
So as Google unveils new services, the natural reaction is for everyone to ooh and ahh about how cool they are and speculate about whether or not Google will be able to lure away users from similar services on Yahoo! or MSN.
But John Aiken, an analyst with independent research firm Majestic Research, said Google has a well-deserved reputation for superior products and that also could be playing into the weakness at Yahoo! He said there is a significant gap between how effective search results are on Google as compared to Yahoo!
To that end, Yahoo! has said that it will take steps to enhance its search functions this year. Aiken said that if successful, Yahoo! should see increased click-through rates on its keyword searches and higher advertising sales. But he said investors are taking a cautious approach on Yahoo! until there is proof of this.
"Yahoo! is trying to increase the relevancy of results and hence the revenue from search. But people are waiting to see in the back half of 2006 to early 2007 how this plays out," Aiken said.
Analysts are quick to add that there are no major fundamental problems with Yahoo!, however. Aiken said that one of Yahoo!'s biggest strengths in so-called branded advertising, things like banners and video ads, and that this portion of the online ad market should experience robust gains this year.
Wolk said that the changes to Yahoo!'s search engine should lead to stronger growth next year. And Moran adds that the stock is now trading at what he thinks is a compelling valuation for longer-term investors.
Still, shares have bounced around in the low to mid $30s for the past few months and analysts aren't holding out much hope for the first-quarter results being strong enough to ignite a new surge.
So investors may have to get used to seeing Yahoo! trade in a tight range for the foreseeable future, especially since another search engine still seems intent on hogging the limelight.
"If you're willing to buy Yahoo! here at this level and wait for an end of year run, I would think you might be in the high $30s by then," said Martin Pyykkonen, an analyst with Hoefer & Arnett. "But to say it's going to pop up after this quarter's results? I'd be reluctant to make that bet. There's more of a focus on Google."
Yahoo! joins the Fortune 500. Click here for more.
Investors didn't cheer Yahoo!'s 4Q results. Click here.