A Chill Fills Search Space

Rohan's call is going against the grain of most other analysts. Jeffries & Co., CIBC and Pacific Growth Equities have upgraded Google this month, though Caris & Co. downgraded the stock to buy on Tuesday. "We do worry about more pronounced seasonality showing up in spending trends as we enter the fifth year of the paid search business model," wrote Michael Gallant in a Feb. 13 research note. "We are also now more bullish on the domestic search market's growth outlook for '05 and '06, even with a ramp in local search spending."

And shortly after Rohan's note appeared this morning, Mark Mahaney of American Technology Research reiterated his buy rating in a note that argued that Yahoo was oversold. Mahaney cited strong organic revenue growth and rising EBITDA margins. "We believe Yahoo shares are oversold here, and we would be aggressive buyers at these prices," he said.

Rohan's contrarian call is especially bold regarding Google. Many Wall Street observers regard earnings estimates and price targets as a game of darts, but Google's refusal to offer financial guidance has turned it into a blindfolded game of pin the tail on the donkey. "The company offers no insight into quarterly trends and no financial guidance, and this does not help the cause in terms of keeping expectations in line with reality," Rohan's note said.

Rohan was careful to point out that any current drop in sponsored-link prices may not translate into a long-term deterioration. While noting that "one could conclude that we are experiencing a deceleration of growth in the U.S. search market, and not necessarily seasonality," he also said "the fact that there is weakness in pricing so far this quarter does not necessarily imply that growth will not rebound later in the year."

What it does mean is that Google and Yahoo! are like any other successful Internet companies -- equally prone to surges and slowdown in revenue growth, and vulnerable to volatility as their customers experiment with still-emerging technologies and markets.

>To order reprints of this article, click here: Reprints