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Yahoo! Shares Plunge to Five-Year Low

Stocks in this article: YHOO GOOG MSFT

SAN FRANCISCO - Yahoo! (YHOO - Get Report) shares reached a five-year low, exacerbated by analyst warnings that a softening display advertising market could hurt the company.

The Internet giant's stock fell as much as 9% before regaining ground in recent trading to $14.23. The stock is now 58% off its 52-week high.

Like most tech companies, Yahoo! is feeling the consequences of a shaky market still reeling from a meltdown in the financial sector.

But Brian Pitz, an analyst for Bank of America, points to a contraction in display advertising as one of Yahoo!'s biggest ailments.

"Our channel checks indicate the market for display ads, particularly branded or CPM-based ads, continues to worsen beyond our prior expectations and from second quarter levels," Pitz wrote in his latest research. "Given the current market environment, we believe advertisers are likely to hold back discretionary brand-building dollars in favor of measurable search and performance-based display advertising."

Pitz noted that spending in financial services and auto, which make up a significant portion of Yahoo!'s display revenue, are down.

He estimates that online image-based advertising spending in the U.S. for financial services will fall 38% in the third quarter from a year ago. That compares to a 27% drop in the second quarter.

Although he expects spending to grow in the auto sector in the third quarter by 17%, that still marks a substantial drop from its 45% growth in the second quarter.

"While auto manufacturers have significantly ramped their online ad spend over the past few years, we note recent comments from auto manufacturers such as General Motors (GM - Get Report) which indicate cutbacks in digital ad spend," he wrote. "We believe the secular tailwinds are not enough to protect online advertising from the effects of the current macroeconomic headwinds."

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