Yahoo shares rise amid broader market decline

Internet company gets a little Wall Street love in intra-day trading following its Tuesday earnings report and as analysts offer up a silver lining on its performance.

Investors pushed shares of Yahoo up in morning trading Wednesday as analysts point to stronger profit margins due to cost cutting and a healthy increase in its search advertising revenues.

The Dow Jones Industrial Average, meanwhile, was down 298.30 points to 8,739.12 and the Nasdaq fell 34.01 points to 1,662.67.

Yahoo rose as high as 5.8 percent to $12.77 a share in intra-day trading, following weak third-quarter results it reported after the markets closed Tuesday. Yahoo's shares were moving in the black in the morning, while the broader markets were posting losses.

USB Securities analyst Ben Schachter noted that while the Internet search pioneer still has a number of problems it has yet to resolve, he remains bullish on the stock for several reasons.

The Wall Street analyst cites several actions the company announced, ranging from cutting 10 percent of its headcount to potential in building its core display advertising business.

Said Schachter in his note:

We still like the display strategy, though execution is key--Yahoo is the clear leader in display. If it can execute against its plan (centered around the APT platform), Yahoo could build a scalable, highly targeted and measurable display ad platform and network that would dominate display advertising across the Web.

Cost cutting--The company announced its intention to cut $400 million in annual operating expenses by the end of 2008 and to pursue "substantial additional cost savings" in 2009.

Schachter, who reiterated his "buy" rating and 12-month $20 price target, also pointed to Yahoo's cash, the fact that short-term and Asian investments combined are worth $7 a share, and that an eventual Microsoft acquisition remains a possibility.

Other analysts, however, remain cautious on the stock.

J.P. Morgan's Imran Khan noted in his report that while Yahoo's search advertising revenues grew 17 percent year over year, it may not be enough to turn the tide against market share losses.

Khan wrote in his research note:

We think long tail advertisers are shifting money from nonperformance-based advertising to the performance-based model and that Yahoo is seeing the benefit of this trend. Additionally, some of the monetization improvement the company made earlier this year supported RPS (revenue per search) growth of 11 percent year over year in the U.S. While we were encouraged by RPS gains, we are still concerned with market share losses. We believe that if the company continues to lose market share, the monetization improvement may stall.

Khan also expressed concerns Yahoo may be losing market share in its core display advertising business to niche sites, and that it should proceed cautiously in its cost cutting to avoid slowing investment in its core platform.

The analyst also noted it appears the controversial Yahoo-Google search advertising partnership is facing opposition from federal antitrust regulators in its current form and, as a result, he is removing $250 million in revenues from his fiscal 2009 forecast relating to the outsourcing agreement.

Analyst Sandeep Aggarwal of Collins Stewart also remains somewhat bearish on the company.

Aggarwal, who maintains a "hold" recommendation, said in a research report:

Though we were impressed with 11 percent RPS lift, arguably not sustainable in a weak economy, and President Decker was largely upbeat on Q4 guidance and Yahoo.com demand, we continue to believe that economic headwinds will affect business. Looking at series of events in past 1 year, i.e. Jerry Yang becoming CEO and announcing his 100 days plan, Microsoft's bidding in January, Yahoo pursuing new investments/strategic alternatives, and now cost cuttings--we continue to believe that the best option to unleash Yahoo's value is to reengage in talks with Microsoft for a search related deal.

Wall Street analyst Jim Friedland of Cowen & Co., meanwhile, offered investors a bit of good news/bad news to chew on. While Yahoo is expected to continue to lose market share in search, its search revenues are expected to grow for the next several years. But come three or four years from now, those search revenues are expected to peak.

 

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