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ANALYST WATCH: Yahoo! loses &#034sure thing&#034 status

    Yahoo! shareholders probably have more compassion for the citizens of Bangladesh after watching another flood of negative news drag this "premier" Internet stock into depths few ever thought possible.

    Folks, Yahoo! (Nasdaq: YHOO) is now trading at a 52-week low of $34 a share that's only about $216 a share less than it was trading at back in January.

    That's not a correction. That's an indictment.

    When the stock periodically shows signs of life, shareholders violently sell into the rally.

    Making matters worse, a pair of analysts suggested this week that Yahoo! might not even meet analysts' estimates in its fourth quarter.

    If that were to happen, it would not only be disastrous for Yahoo! but for the entire dot-com universe. This stock, even after its apocalyptic collapse in 2000, is still trading at a price-to-earnings ratio of 77.

    That's a stock that's trading on tomorrow's hope. The here and now should be a given. Apparently it's not.

    W.R. Hambrecht analyst Derek Brown cut the stock Thursday from a "buy" recommendation to "neutral" primarily because of continued weakness of online advertising.

    One could easily make a valuation argument but we'll leave that alone for now.

    "Observations from the channel suggest that the current quarter is proving to be extremely challenging for all participants, including Yahoo!," Brown said in a research note. "We do not expect any upside to our fourth-quarter estimates and think there is a legitimate chance that Yahoo! falls short in the quarter."

    Online ad sales dried up

    There is enough anecdotal information to confirm Brown's observations. It's not so much the much-overdue demise of fly-by-night dot-coms such as Pets.com, Women.com and dozens if not hundreds of others.

    But when a company like Scient (Nasdaq: SCNT), found in many mutual and Internet funds at major brokerage firms, warns that its going to post a loss this quarter and cut hundreds of jobs, you know we've only seen the tip of this iceberg.

    Too many bogus companies overextended their sugar daddies in the past two years. Now, no one has the cash to advertise anywhere, much less online.

    DoubleClick (Nasdaq: DCLK), another highly recommended stock, is trading under $12 a share after announcing layoffs. Analysts responded by cutting estimates for the next two quarters.

    So here sits Yahoo! with arguable the most ubiquitous name on the Internet fighting for its life because so much of its early growth came at the expense of well-heeled investment bankers and venture capitalists.

    Despite the company's efforts to rid itself of shaky dot-coms, and it certainly has done that, the growth that everyone assumed Yahoo! would enjoy just hasn't materialized.

    In plain English, Yahoo! now finds itself begging for advertising dollars that used to come in torrential downpours back in the Nasdaq 5,000 days.

    Eventually all these garbage dot-coms will all go away and Yahoo! will at least know that it's dealing with customers who can pay for their ads. In the meanwhile, it's relying on those brick-and-mortar guys who just didn't "get it" a couple years ago.

    Losing faith on the Street

    Now many of those old-school firms are holding all the cards, negotiating better deals or withholding their advertising dollars altogether.

    Merrill Lynch analyst Henry Blodget also slammed the stock this week when he cut his sales estimates for Yahoo! first two quarters in 2001.

    He now expects sales of $290 million in the first quarter of 2001, down from $324 million, and $330 million in the second quarter rather than $338 million.

    Blodget then raised estimates for the remaining two quarters, from $370 million to $380 million in the third quarter, and from $410 million to $440 million in the fourth quarter.

    "We think that the company will make Q4 and then reduce its forecast for Q1 and Q2, however, and we believe this could hit the stock near-term," Blodget wrote in his report.

    As bad is things are for Yahoo!, there's reason to believe in the stock, at least in the long run.

    Market researcher Universal McCann predicts Internet advertising will grow 65 percent this year, down from the 150 percent clip it had been running at, to $3.2 billion.

    Jupiter Media Metrix predicts online ad sales will eventually grow to more than $11.5 billion by 2003. The Internet Advertising Bureau chimes in that, adjusted for inflation, online ads have outpaced broadcast TV ads in the past five years.

    That's all well and good but means little to momentum players who used to constitute the bulk of Yahoo!'s shareholder base.

    And it could get much worse before it gets better.

    "We are not lowering our estimates at this time, but will likely do so after the company reports fourth-quarter results in early January," Brown added. "Despite recent weakness in Yahoo!'s shares, we suggest that investors remain on the sidelines until the smoke clears."

    Don't be surprised if the rest of Yahoo! shareholders move to higher ground to get a better view of the fire.