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HolidayBuyer's Guide
Internet

Blodget expects pickup in Net ad spending next year

Merrill Lynch analyst Henry Blodget believes the Internet advertising rut should improve by the second half of next year, as weak companies consolidate and clear winners emerge.

Merrill Lynch analyst Henry Blodget said Wednesday he believes the Internet advertising rut should improve by the second half of next year, as weak companies consolidate and clear winners emerge.

"We believe that once this transition period concludes (and year-over-year comparisons become easier), market growth should accelerate for the second half of 2001 and 2002," he wrote in a research note.

In the meantime, Blodget expects to see more earnings warnings in the upcoming fourth quarter, and a very slow first quarter 2001, especially from the less established companies. He said advertisers are reevaluating the effectiveness of online advertising and experimenting with a return to the "cost-per-action" advertising model, in which companies pay based on the number of times consumers click on their advertisement.

"We do not believe online advertising is seeing as much of a seasonal pickup in Q4 as some had expected," he wrote. "We would therefore remain cautious about adding new money to online-advertising driven stocks until Q1-Q2 (when we should have better visibility)."

However, not all Net companies are created equal when it comes to determining who will be hurt by changes in the ad climate. Blodget's report mentioned that America Online, for example, is better insulated to an advertising slowdown than Yahoo.

In an interview, Blodget noted that "approximately 20 percent of AOL's overall revenue is advertising driven while approximately 90 percent of Yahoo's is."

In his research note, Blodget wrote that Yahoo could have a hard time pleasing investors until the second quarter of 2001.

At the close of regular trading, Yahoo shares were down $2.31 to $57.13, while AOL shares fell 46 cents to $49.44.

Over the past quarter, several companies dependent on Internet advertising reported disappointing earnings as scores of struggling dot-com's cut back on ad spending. After reporting earnings last month that were in line with Wall Street's expectations, shares of Yahoo dropped as analysts feared slowed advertising revenues would impact its future quarters.