Yahoo's progress in launching a new Internet ad sales system could be a turning point for its shares as investors bet on faster revenue growth, analysts said yesterday.
Yahoo shares rose 8% yesterday and lifted rival Internet sector companies after it said its new system, dubbed Panama, would be fully introduced in the US as of 5 February, about a month ahead of Wall Street expectations.
The ad system brings Yahoo in closer league with Web search leader Google, honing the technology that allows advertisers to pay for search terms based on their popularity.
Panama also helps advertisers target the ads sent to specific audiences on the Web or rotate ads based on their effectiveness, capabilities Google has offered for several years.
"Yahoo has not executed as well as Google, has not had as strong a software platform for advertising, but they're still a very strong number two player and that's worth something," said Global Crown Capital analyst Martin Pyykkonen.
"I'm not forecasting any kind of wholesale shift here, that all of a sudden Google is going to fall by the wayside... but I do think they [Yahoo] will narrow the gap," said Pyykkonen, who rates both company shares "overweight".
If Panama gained momentum, Yahoo's revenue growth could rise to a high-teens to low-20s percentage rate by the end of 2007, Pyykkonen said. That would outpace Yahoo's own forecasts for full year growth, issued on Tuesday - which fell below average Wall Street estimates.
Yahoo shares are down about 15% in the last year as the company has struggled with delays to Panama and a slowdown in spending by some key customers and has reshuffled its management. That compares with a nearly 16% jump for Google shares and a 13.5% rise in the Standard & Poor's 500 Index.
"Yahoo is facing challenges but management is effectively addressing them, in our view, and the company could be nearing an inflection point," wrote Needham & Co analyst Mark May in a research note. He rates the stock a "buy" but cut his price target to $30 from $33 on Wednesday. The stock was up $2.06 to $29.02 in afternoon trading on Nasdaq after trading as high as $29.20.
Positive sentiment
Yahoo executives said on Tuesday during a conference call to discuss fourth-quarter results that advertising clients were moving to the new system faster than it had expected.
Panama's ability to draw more ad dollars from clients should accelerate growth in the second half of the year, with the first quarter likely representing a "trough", they said.
That view helped investors brush aside concerns over Yahoo's first-quarter and full year revenue forecasts.
Yahoo's fourth-quarter net income fell 61%, to $269 million, weighed down by stock option expenses. The company expects 2007 revenue of $4.95 billion to $5.45 billion compared with analysts' forecasts of $5.2 billion to $5.92 billion, as compiled by Reuters Estimates.
"We view [fourth-quarter] results as a starting point for more positive sentiment on the stock, with expectations reset and the negative impact of a weaker affiliate network outlook incorporated into Yahoo's guidance," wrote Merrill Lynch analyst Justin Post.
Some analysts took a more cautious view, noting that the move to Panama could cause some short-term costs if advertisers pulled back on spending as they learned to use the new system.
Yahoo also faces a potential drop in prices for its key branded advertising sales, where competition has grown with the explosion of social network sites like News Corp's MySpace.com and Google's YouTube.
Citing such factors, Goldman Sachs cut its rating on Yahoo to "neutral" from "buy", with a $31.50 price target.
Google gained $17.35, or 3.6%, to $496.40.
Internet marketing company aQuantive rose 3%, to $26.35, while ValueClick gained 4%, to $26.33.
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