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A "lousy" online advertising climate led influential Merrill Lynch analyst Henry Blodget on Wednesday to cut first and second quarter fiscal year 2001 revenue estimates for Web powerhouse Yahoo! (Nasdaq: YHOO), which relies heavily on advertising revenue.
However, Blodget said he expects Yahoo! to rebound in the second half of 2001 and has maintained his full-year estimate of US$1.45 billion.
"We are cutting Q1 and Q2 estimates, as we believe the hangover effects of the dot-com shakeout will continue to act as a drag on online advertising market growth in these quarters," Blodget said in a report.
Blodget cut revenue estimates from $324 million to $290 million in the first quarter and from $338 million to $330 million in the second quarter.
To adjust for lowered expectations in the first half of the year, Blodget increased estimates for the third quarter from $370 million to $380 million and for the fourth quarter from $410 million to $440 million.
Blodget is not the only analyst to cut Yahoo's revenue estimates recently. Last week, SG Cowen Securities analyst Scott Reamer also lowered revenue estimates for the Santa Clara, California-based Web portal.
Immediate Impact
The effects of Blodget's dismal expectations were immediate on Wall Street, where Yahoo's stock dropped $6.375, or 14.5 percent, to $37.50 on Wednesday. Yahoo! reached a high of $250.06 in January but has been in a steady decline ever since.
Despite the dismal short-term outlook, Blodget maintained his buy recommendation for the company.
"We would be comfortable investing in Yahoo! today if our holding period was a year or more," Blodget said, adding that investors with "shorter-term horizons may want to wait."
Other analysts have not been so charitable and have downgraded the company to hold or neutral in the past few months. In October, SG Cowen and Dain Rauscher Wessels both downgraded Yahoo! from strong buy to neutral and Janney Montgomery Scott downgraded the company from accumulate to hold.
Lousy Environment
Despite a prediction by Jupiter Research that online advertising will reach $11.5 billion in 2003, Blodget said that "we continue to believe the online ad environment will remain lousy through Q1 as a result of the ongoing dot-com shakeout."
Additionally, some Internet advertising companies have been showing signs of trauma in recent days. On Tuesday, controversial ad firm DoubleClick confirmed that it is laying off more than 100 employees, while rival 24/7 announced a significant layoff in November.
The Silver Lining
Although the first half of 2001 may have to weather a tough online advertising climate, Blodget believes the industry will rebound after the first quarter and revenues will "accelerate modestly through the year."
Blodget also believes that the stock prices of many Net ad-driven stocks are in the process of "bottoming" and will begin to rebound after the first quarter.
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