Deutsche Banc Alex Brown analyst Andrea Williams Rice today issued a report downgrading Yahoo to "buy" from "strong buy." News of the rating cut sent Yahoo shares down as low as $115. By the close of regular trading, Yahoo had slid $5.88, or 5 percent, to $116.50.
Rice's concerns stemmed from an overall decrease in advertising spending among dot-coms. Yahoo's revenue stream remains highly dependent on advertising, much of which comes from other Internet companies.
Now that venture capital and private equity funding has quickly dried up, burgeoning dot-coms looking for widespread brand exposure will have less cash to spend on advertising. The result could be lower revenue growth for Yahoo over the coming months.
"With fewer companies competing for the valuable real estate, the company will likely capture less revenue than it would otherwise," Rice wrote in her report.
Rice is not alone in raising warning flags about Yahoo's future revenue growth. Last month, Merrill Lynch Internet analyst Henry Blodget issued a report that predicted lower-than-expected revenue growth for the Web giant. Like Rice, Blodget pointed to weakening advertising demand from cash-strapped dot-coms.
The report precedes Yahoo's quarterly earnings report, slated for release next week. Rice expects Yahoo to report results "in line (with) or slightly better" than her estimate of 11 cents per share in profit and $245 million in revenues.
For Yahoo, the possibility of waning advertising revenues has caused the Web leader to search other avenues for cash. The company recently launched Corporate Yahoo, a service that sells customized versions of its portal to companies, in hopes of generating a new, non-advertising revenue stream.
Although Yahoo has outpaced many of its Web portal rivals such as Lycos, AltaVista and Go.com in traffic and revenues, it still faces some deeper-pocketed giants.
America Online's pending acquisition of media conglomerate Time Warner is expected to create an interactive titan with revenues from subscription services, advertising, direct marketing and Internet access, to name a few.
The merger remains a concern in the eyes of Yahoo. That's because the company relies on turning one-shot visitors into return customers who sign up for its services and view its advertising banners. With a competitor just one click away, Yahoo needs to spend heavily on marketing and branding.
Meanwhile, AOL stands to gain more subscribers, who pay $21.95 a month, from cross-marketing to people who consume Time Warner's laundry list of magazines, books, movies and music.
"In certain cases, our competition has a direct billing relationship with the user, which we generally lack," Yahoo wrote in a June filing to the Securities and Exchange Commission. "This relationship permits our competitors to have several potential advantages, including the potential to be more effective than us in targeting services and advertisements to the specific taste of users."