Yahoo! ( YHOO) was bid up in the Wednesday premarket after Smith Barney said investors were missing its core strengths.

The brokerage upgraded the shares to a high-risk buy from hold and set a $60 price target, arguing that its recent acquisition of Overture Services was obscuring strength in its traditional search, advertising and user fee cash flow. The shares were recently up $1.72, or 4%, to $44.30.

Smith Barney predicted that Yahoo!'s core cash flow will increase 35% a year through 2006, following on an expected 50% increase in the current year. The strength should cause Yahoo!'s valuation to expand.

"We expect that as 2004 progresses, investors will begin to better understand the internal dynamics of Yahoo!'s new business model -- vertically integrated in search, the leader in traditional Internet advertising and expanding and recurring revenue in the fees line, with a potentially less-exciting third-party services business contained in the old Overture network," Smith Barney wrote.

The brokerage raised its 2004 gross revenue estimate to $2.98 billion, and raised its estimate for revenue net of traffic-acquisition costs to $2.27 billion from $2.18 billion. It upped its earnings estimate to 59 cents a share from 53 cents a share.

"We believe that greater appreciation of the sustainable growth of the core Yahoo! business will come with various new product introductions, overseas deployments, higher selling prices and strong subscriber additions that we anticipate for Yahoo! over the course of 2004."

The Smith Barney analyst who wrote the report is long the stock and the brokerage's parent makes a market in the shares.

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