Yahoo shrugged off a downgrade from Goldman Sachs and eked out a 6 percent gain Tuesday. The rating cut came as a new analyst took over coverage of the stock and banished it from Goldman Sach's recommended list.
Shares in the Internet portal were up $1.44 to $23.63, still far below their 52-week high of $205.63.
Analyst Anthony Noto, taking over Yahoo (Nasdaq: YHOO) coverage from Michael Parekh, lowered the stock's rating to "market outperform."
The move reflects the weakening economic environment and Yahoo's shift from an advertising-based business model to a "three-pronged business built on ad/commerce, premium consumer services and business services," Noto wrote.
Noto also lowered projections for the company's 2001 revenue to $1.2 billion from $1.24 billion. He cut Goldman's 2001 Yahoo earnings estimate to 34 cents per share from 38 cents per share.
The analyst said he sees a strong opportunity for Yahoo to expand beyond Web advertising into e-commerce and premium services. Yahoo's corporate portal strategy also has the potential to provide subscription fees, he said.
Yahoo needs to show success in these areas coupled with a recovery in the online-advertising market before investors will respond, Noto said.
"Appreciation in the stock price is limited and would be driven primarily by increased visibility in earnings as the company moves through a critical transitional period rather than multiple expansion," Noto wrote.
Advertising still makes up about 85 percent of Yahoo's revenue, according to estimates for 2001's total, something that has been causing other analysts concern in the current environment.
Pacific Crest Securities analyst Steve Weinstein also lowered his estimates for Yahoo, citing recent negative data about online advertising.
"The dot-com fallout is more significant and happening faster than we previously assumed," Weinstein wrote in a research note. "We were assuming the dot-com business to be down 50 percent for 2001. We now consider that a best case."
The Pacific Crest analyst said the situation in Europe and among traditional advertisers was also looking grim.
Weinstein said that while he sees a possibility for Yahoo to grow more than 30 percent per year over the next three to five years, he rates the stock a "market perform" due to the "increasingly hostile environment for online advertising."