Yahoo Downgraded Due to Lost Market Share

Cowen’s Jim Friedland this morning dropped his rating on Yahoo (YHOO) to Neutral from Outperform, asserting that the company’s recent pre-announcement was triggered by lost market share in both display ads and paid search.

Frieldland says that the problems at Yahoo are unique to the company, rather than a reflection of any slowdown in the online ad market. “We continue to believe that Yahoo is one of the primary beneficiaries of the secular growth in the online ad market; however, we believe near- and long-term expectations are too high and the potential for upside surprise is low. Although Yahoo shares have experienced a correction, we do not expect the shares to outperform the market over the next 12 months.”

Friedland says he believes Yahoo has been growing slower than the overall online U.S. ad market for two quarters now. “Although [the] company’s core display ad biz has outpaced the [market], we believe AOL (TWX)and emerging websites such as MySpace (NWS) are gaining share,” he writes. “Further, while page views have grown solidly YTD, we believe it will be increasingly difficult for Yahoo to increase user engagement over next few years as the user base matures, leading to slower ad inventory growth.”

Friedland adds that he is concerned that the company’s rumored acquisition talks with Facebook could lead the company to “acquire growth at the expense of returns.”

Friedland said he is lowering his 5-year revenue compounded growth estimate to 15% from 16%. For this year, he went to 64 cents a share from 66 cents; for next year he is now at 76 cents, down from 79 cents.

Other recent downgrades have come from Thomas Weisel, Jefferies, JMP and Citibank and W.R. Hambrecht.

The company reports earnings after the close of trading today. In pre-market trading, Yahoo shares were down 47 cents to $23.71.

Meanwhile, some people have started to wonder if maybe the company should be acquired.The blogger/venture capitalist Fred Wilson wonders if someone might snap up the increasingly bruised Yahoo.

There’s a lively discussion of potential bidders: Comcast (CMCSA), News Corp. (NWS), Google (GOOG), Microsoft (MSFT), which concludes that probably no one will buy it, but that Microsoft might be the most sensible potential suitor. Keep in mind that the stock even after recent weakness has a market cap north of $33 billion, so the list of possible acquirers is pretty short.

In the end, Terry Semel may need to step out of the way - or change his act. Eric Jackson, of Jackson Leadership Systems, offers Semel a list of things he can do to get the company energized - and it starts with Semel selling his digs in LA-LA land and moving to Atherton.

YHOO 1-yr chart:

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Comments

[kkin365:]

Good but scary. Luckily, I do not have a position in YHOO. omooc

2006 Oct 17 09:00 PM