Yahoo needs to dazzle investors

NEW YORK (CNNMoney.com) -- With buyout rumors and CEO criticism swirling, Yahoo needs a stellar earnings report on Tuesday to silence its doubters.

The aging Internet icon's growth has slowed to a crawl, and its stock is down 6% so far this year. The company has lost market share in display advertising -- once its biggest stronghold -- to rivals Google and Facebook.

Chief executive Carol Bartz says she can turn Yahoo around and boost its revenue if she's given a few years, but she may not have that kind of time. As Yahoo languishes, critics are twittering about how long Bartz's tenure will be and when takeover vultures will strike.

On Wednesday, the Wall Street Journal reported that fellow struggling Internet behemoth AOL was in very early-stage talks with leveraged buyout firms about making a joint bid for Yahoo. AOL, Yahoo, Silver Lake Partners and Blackstone Group declined to comment, but Yahoo shares soared 15% in after-hours trading on Wednesday.

But on Thursday, the stock lost most of those gains after a New York Times report poured cold water on the AOL-Yahoo rumor, saying a potential deal was "pie-in-the-sky" and "not happening anytime soon." Fortune cast doubt on the math, pointing out that few private-equity firms have funds big enough to devour AOL.

Analysts were largely downbeat about the implications of such a deal. AOL has struggled with its own legacy as an outdated Internet portal, and it's trying to reinvent itself after a 2009 spinoff from CNNMoney.com parent Time Warner (TWX, Fortune 500).

"Yahoo and AOL have a common problem: Their position as a generic portal is less relevant to advertisers [looking for] targeted opportunities," Wedge Partners analyst Martin Pyykkonen said in a research note.

Others pointed out that a Yahoo-AOL merger would create a large pool of Web content, but it would be difficult to charge for that content.

Chris Bulkey, analyst at Technology Research Group, doesn't think a merger can save Yahoo: "Their financials are just a wreck. The whole company is a complete mess, and no one should buy the stock."

Bartz needs big numbers: Yahoo CEO Bartz has been aggressive in cutting costs, and she was praised for engineering a search deal with Microsoft's (MSFT, Fortune 500) Bing. Another plus for Yahoo is its 39% stake in Alibaba, one of China's biggest Internet companies. Last month, Alibaba offered to buy back the stake for about $11 billion -- about half of Yahoo's current market valuation. Yahoo declined.

But Bartz's tenure has been fraught with problems, and several senior managers have fled the company in the past few months.

Bartz knows she must deliver results -- after all, her predecessor was forced out. Yahoo co-founder Jerry Yang was the company's CEO until 2008, when Microsoft offered a $47.5 billion buyout deal. Shareholders were incensed when Yahoo snubbed the offer, and Yang stepped down.

Pyykkonen, the Wedge Partners analyst, thinks Yahoo missed the boat on a golden deal.

"In contrast to the Microsoft offer a few years ago, Yahoo no longer has significant growth prospects for the future," he said.