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Yahoo! Shares Undervalued: Analyst

SUNNYVALE, Calif. ( TheStreet) -- Shares of Internet giant Yahoo! (YHOO - Get Report) will bask in the warm afterglow of the company's recent search partnership with Microsoft (MSFT - Get Report), offering plenty of upside to investors. This is the message from analyst firm Jefferies & Company, which raised its Yahoo! price target Tuesday, citing the benefits of the Microsoft deal.

"Despite the recent run-up in Yahoo! shares, we find the valuation still attractive as it fails to fully reflect accretion from the Microsoft deal, potential upside from Asian assets and rebound in display [ads]," wrote Jefferies analyst Youssef Squali, in a note released Tuesday. "Shorter-term, management's focus on core priorities and cost should bode well for stock."

Jefferies raised its Yahoo! price target from $20 to $23, assuming the deal closes by the end of 2010. Yahoo!'s shares have risen more than 35% in the last six months, although Squali feels that the company's stock is still undervalued.

Under the terms of the 10-year pact, Yahoo! will use Microsoft's Bing search engine and collect 88% of the advertising revenue for the first five years of the deal.

Seen as something of a masterstroke by Microsoft in its attempts to challenge Google (GOOG - Get Report), Squali predicts that the agreement will also help Yahoo! expand its margins.

Yahoo! also launched a $100 million branding campaign recently, a key part of CEO Carol Bartz's efforts to reposition the company. This, however, was not factored into Jefferies' estimates, although Squali sees the move as a positive.
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