No Love for Google, Yahoo!

Updated from 11:37 a.m. EST

Google(GOOG) and Yahoo!(YHOO) slid Thursday after a top analyst downgraded the shares and lowered his price targets on both.

RBC Capital Markets' Jordan Rohan cut his investment rating on the stocks to sector perform, saying channel checks show unexpected weakness in paid-search pricing. Rohan, who had previously rated Google a "top pick" and Yahoo! outperform, lowered his price target on Google to $200 from $250 and cut Yahoo!'s to $34 from $43.

The call is ominous, considering Rohan's general enthusiasm for Google. He started the shares at $235 in early January after joining RBC from Schwab SoundView; at the time, the target was the highest of any major Wall Street firm. RBC hasn't done banking for either company.

Google shares were recently down $8.55, or 4.4%, to $185.40. Yahoo! tanked $1.57, or 4.9%, to $30.55. Stocks feeling residual pain included Ask Jeeves(ASKJ) and Mamma.com(MAMA), and to a lesser extent Amazon(AMZN) and eBay(EBAY).

At Google, RBC said pricing on its domestic network is likely to fall sequentially by a percentage that is in the double digits, a "significant negative inflection point after phenomenal fourth-quarter results." The brokerage cut its sequential revenue growth estimate to 5% from 13%.

The $200 price target reflects a multiple of 20.2 times RBC's forward estimate of earnings before interest, taxes, depreciation and amortization of $2.6 billion and 39.3 times its forward earnings estimate.

"We believe this level of valuation is defensible and reasonable in the long term," the brokerage wrote. "However, the loss of momentum in the category, coupled with high investor expectations after two quarters of blowout earnings, creates a situation where investors are likely to apply a higher discount rate to future cash flows of Google."

A similar argument informed the Yahoo! downgrade, with RBC's channel checks showing quarter-to-date pricing in domestic paid search down in the double digits. That finding is "much weaker than expected," Rohan wrote. The brokerage cut its first-quarter EBITDA estimate to $304 million from $327 million and dropped its earnings estimate to 10 cents from 11 cents.

"We had hoped that momentum in paid search from 4Q04 would carry through to 1Q05 results, but now we believe otherwise," the brokerage wrote. "Beyond first-quarter results, we do not see many catalysts to move the shares significantly higher as we move into the seasonally weakest time period."

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