Investors are used to analysts issuing divergent opinions on the vast majority of shaky, money-losing Internet stocks. But they sat up and took notice this week when several analysts weighed in on the Holy Grail of the sector.
God forbid anyone point out a possible chink in the armor of Yahoo!, one of the few Internet stocks that's managed to sustain incredible revenue growth and profits through the ups and downs of the past year.
But that's what happened.
On Monday, Lehman Brothers analyst Holly Becker helped send Yahoo! (Nasdaq: YHOO) shares into a brief slide when she questioned its growth prospects and sky-high valuation in light of the slowdown in Internet advertising.
Becker reiterated her "neutral" rating on the stock, saying that while the it's down more than 45 percent from its 52-week high, it's still not a cinch buy at this point.
That Becker maintains a "neutral" rating on the stock, much less the audacity to reiterate it this week, should give even the most ardent Yahoo! fan a moment's pause.
Keep in mind, only four of the 36 analysts covering Yahoo! maintain a "neutral" rating on the stock.
Becker's angle is pretty simple: Lots of Internet companies, particularly retailers, are struggling to keep their doors open, much less pay for advertising at premier sites such as Yahoo!. As more and more of these companies fail, Yahoo! and other online sites will see their advertising sales slip.
"While we recognize that leading portals, like Yahoo! and AOL, will get the last dollar from burgeoning Internet start-ups, it's only a matter of time before we see the impact on Yahoo!'s results," Becker wrote in a research note.
Becker is expecting third quarter sales of around $275 million, compared to $270 million in the second quarter, and page view growth of around 16 percent sequentially.
That's a far cry from the sequential revenue gains it's made for most of the past three years.
In its second quarter, Yahoo! pocketed $74 million, or 12 cents a share, on sales of $270 million.
That $270 million in sales was up 18 percent from the $228.4 million it recorded in the first quarter and up a 110 percent from the year-ago quarter.
Coming to Yahoo!'s defense
After watching Yahoo! shares lose about 10 percent of its value Monday, several Internet analysts were compelled to calm down the selling masses.
On Tuesday, Merrill Lynch's Henry Blodget pointed out that Becker's reduced revenue estimate for the quarter put it within a few million bucks of his forecast. He also reiterated his "buy" recommendation.
"We continue to think that sentiment toward the leading consumer net stocks is gradually improving and that Yahoo! will have a solid finish to the year," Blodget wrote in a research report. "We expect the stock may trade in a range through the 3Q reporting season (due to ongoing questions about the quarter) and then rally modestly in 4Q."
On Wednesday, CS First Boston started coverage of the stock with a "buy" recommendation.
One concern that all analysts have about Yahoo! is the fact that of its top 200 advertisers, dot-com companies represent 61 percent of its total advertisers. Traditional companies account for only 23 percent of ad sales.
This dependency on dot-coms will change dramatically in the next year whether Yahoo! likes it to or not. But this transition will come at a price as traditional, deep-pocketed companies are more likely to haggle for better rates and concessions that Yahoo! hasn't had to offer fledgling Internet companies.
Last week, CIBC World Markets analyst John Corcoran sort of hedged his bet when he cut Yahoo!'s 12-month price target to $215 a share from $250 a share but maintained his "strong buy" recommendation.
In defense of the analysts, it must be difficult to turn your back, no matter how slightly, on Yahoo! considering its incredible traffic, reach and profitability to date.
It's tough to get off a horse that's run so well even if it shows signs of tiring.
Third-quarter expectations watered down
First Call Corp. consensus is expecting Yahoo! to earn 12 cents a share in its third quarter.
Yahoo! has earned its reputation as a company that consistently beats the consensus estimate by a penny or two in every fiscal quarter.
But there's a chance that it might only meet the estimate this quarter.
"Yahoo's 2Q also benefited from unexpected upside in e-commerce,'' Becker wrote in her research note. "In addition to advertising dollars, Yahoo gets a cut of certain sales that go through its site. But, with a lion's share of its merchants already paying a royalty and flattish transaction growth, we believe it is unlikely that 3Q will see as great of an impact."
It says here that Yahoo! will find a way to at least meet or beat the Street estimate in the third quarter despite the traditional slowdown in online advertising during the summer and the shakeout of iffy dot-coms.
We're still talking about Yahoo! here. The traffic, the registered user base and even watered down advertising sales will still be far beyond what anyone could have expected two or three years ago.
But at least some analysts are willing to take a closer and somewhat critical look at one of the sector's few standouts.