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Analyst cuts growth projections for Net, e-commerce companies

A Wall Street analyst says investors should brace themselves for companies lowering their forecasts for future quarters.

With the meltdown in the financial markets over the past several weeks and an economy that's in need of resuscitation, one Wall Street analyst cut his growth estimates for Internet advertising and e-commerce companies, according to a research note released Friday by Collins Stewart.

And as companies gear up to report their third-quarter financial results this month, investors should brace themselves for companies lowering their forecasts for future quarters, Collins Stewart analyst Sandeep Aggarwal wrote in his research note.

As a result, Aggarwal had this to say about his Internet advertising outlook:

We are cutting our forecast for the global Internet ad spend by 2 percent for 2008 and 4 percent for 2009 and 5 percent for 2010. Now we estimate worldwide Internet advertising spend to grow by 22 percent in 2008 and 20 percent in 2009 verses our prior estimates of 24 percent and 23 percent respectively. For (the) U.S., our new estimates imply growth of 20 percent in 2008 and 18 percent in 2009 verses our prior estimates of 23 percent and 21 percent respectively.

Internet search and video advertising, meanwhile, is expected to grow above average during this time period, while online classified and banner ads are expected to fall short of meeting that mark, Aggarwal added in his note.

Growth prospects in the U.S. e-commerce arena received a bigger cut from Aggarwal than the ones he gave for the U.S. Internet advertising sector. The analyst lowered his growth prospects by four percentage points for e-commerce companies, while Internet advertising companies received a three-percentage point cut on their outlook.

According to his e-commerce outlook: "We are cutting our forecast for U.S. e-commerce by 3 percent for 2008, 6 percent for 2009 and 7 percent for 2010. We now estimate U.S. e-commerce spend to growth by 14 percent in 2008 and 12 percent in 2009 verses our prior estimates of 18 percent and 16 percent, respectively."

Given the expected slowdown in growth for the two sectors, it comes as no surprise that Aggarwal would lower his price targets for the stocks of some of the players that he follows.

Over the next 12 months, the Wall Street analyst now expects Google's stock to reach $575 a share, lower than the previous bar of $615 a share. For Yahoo, the bar remains unchanged at 21 a share.

On the financial performance front, Aggarwal now anticipates Google to generate 1.1 percent fewer dollars than he previously forecast, when the company exits 2008. And Google's earnings per share are now anticipated to come in roughly 1.9 percent lighter.

"Should the economy run into a recession, this would be only the second downward economic cycle for the Internet. Each Internet company is at a different phase of its evolution," he said in his report. "We believe that a possible recession will be felt harder by those companies that have been delivering extremely high organic growth rates, have high operating leverage, or are approaching minimum operating scale levels in 2008-2009."