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Ya-who? Stock Falls to Biggest One-Day Drop

SAN FRANCISCO — Yahoo’s stock price plunged by nearly 22 percent Wednesday, marking its largest one-day drop ever after the Internet powerhouse postponed a pivotal change to the advertising formula that propels its profits.

The Sunnyvale, Calif.-based company jarred Wall Street with the unexpected delay late Tuesday after announcing solid second-quarter results that mirrored analyst estimates.

On Wednesday, Yahoo Inc.’s shares plummeted $7.04, or 21.8 percent, to close at $25.20 on the Nasdaq Stock Market. The downturn surpassed a 20.9 percent downturn in Yahoo’s stock in October 2000 after the company warned investors it was about to be hard hit by the dot-com bust.

The wipeout erased about $10.4 billion in shareholder wealth.

At one point, Yahoo’s shares sold for as little as $25.04 — the cheapest since April 2004.

Here’s Yahoo’s problem as Wall Street sees it: the owner of the Internet’s most trafficked Web site keeps raking in more money as advertisers continue to shift their spending online, but it still lags well behind search engine leader Google Inc.

And now it looks like Yahoo won’t be closing that gap as soon as management had promised.

“I can sense the frustration of investors,” said Piper Jaffray analyst Safa Rashtchy. “It’s discouraging and disheartening, especially because Yahoo didn’t really give a good reason for the delay.”

Rashtchy is maintaining his “outperform” rating on Yahoo’s stock, although he lowered his 12-month target for the shares from $42 to $36.

Other analysts weren’t as forgiving. For instance, JP Morgan Securities analyst Imran Khan downgraded Yahoo’s stock to “neutral” and expressed doubts whether the company will even be able up to live up to its financial projections for the rest of the year. He also believes Yahoo is destined to fall further behind in its technology race with Google, which will provide an update on its progress Thursday when it is scheduled to release its second-quarter results.

Yahoo’s bad news didn’t take a big toll on Google, whose shares dipped $4.05, or 1 percent, to close at $399 on the Nasdaq. Google’s market value of about $120 billion is now more than three times greater than Yahoo’s.

Despite Wednesday’s harsh backlash against Yahoo, the company isn’t exactly struggling. Second-quarter revenue rose 26 percent to $1.58 billion and, after stripping out windfalls and accounting changes that pushed up last year’s results, earnings rose 8 percent to $164 million.

Numbers like that are just one of the reasons market observers like ThinkEquity Partners analyst Stewart Barry view Yahoo’s stock as a bargain right now.

Wednesday’s sell-off wouldn’t have been so severe if Yahoo Chairman Terry Semel and his management team hadn’t delayed a much-anticipated change in the company’s formula for displaying ad links by one to three months.

Investors have been eagerly awaiting the new ad platform, hoping the improvements would enable Yahoo to do a better job displaying short ads. The clicks on those ads, which typically appear as text on the top and sides of Web pages, are critical because they trigger commissions for Yahoo and its partners.

Google’s financial growth during the past two years has outstripped Yahoo’s partly because it has developed a better formula for determining which ads to display alongside search results — an advantage that even Semel concedes.

“We are not monetizing as well and it is costing us a lot of money,” Semel said Tuesday in an interview.

Because Google closely guards it technology secrets, its advertising formula remains one of the Internet’s great mysteries.

But this much is clear: Google has been far more adept than Yahoo at analyzing what people are entering into a search box or reading on a Web page and then quickly deciphering which ads are most likely to gain attention to possibly garner a revenue-producing click.

Although Yahoo holds an advantage over its rival in serving up visual advertising, search advertising for now is the biggest moneymaking channel, which is why Yahoo has been working on fixing its biggest shortcoming for more than a year under a project code-named “Panama.”

In May, Yahoo raised hopes by telling analysts it planned to start rolling out the search advertising changes in the third quarter and complete the process in the fourth quarter.

Yahoo now doesn’t expect its new approach to be fully deployed until early next year. Semel said Yahoo didn’t want to risk a hiccup as advertisers ramped up their spending for the holiday season.

“We feel terrific about (the new formula) and know the importance of it,” Semel said. “There is nothing wrong or nothing we are upset about.”

Yahoo still boasts the Internet’s largest audience with 402 million unique users. But it has been losing favor among investors as Google has widened its lead in the lucrative search market.

Through June, Google held a 44.7 percent share of the U.S. search engine market, up from 36.9 percent at the same time last year, according to comScore Media Metrix. Yahoo ranked second with a 28.5 percent share, down from 30.4 percent a year ago, comScore said.


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