Internet advertising looks like it will continue its recovery this year. And that's good news for Yahoo! ( YHOO).

The Internet bellwether, slated to report first-quarter results after the market's close Wednesday, has Wall Street's blessing as the beneficiary of a rising tide in online advertising.

Analysts' reports going into the earnings call indicate that Yahoo! -- whose stock has more than doubled over the past year and trades at more than 90 times estimated 2004 earnings -- still hasn't worn out its welcome on the sell side.

Now, all the company has to do is put to rest some lurking concerns about overvaluation -- including that of minority-owned Yahoo! Japan -- and competition from privately held Google.

Yahoo!'s shares -- which hit a 52-week high of $50.99 on Monday -- fell $1.22 Tuesday to close at $48.77.

Underpromising

For the record, the consensus of analysts surveyed by Thomson First Call is for the company to post first-quarter earnings per share of 11 cents, and operating income, before depreciation and amortization -- formerly known as EBITDA -- of $161 million.

The First Call revenue forecast is $501 million -- a net revenue figure, actually, which excludes the traffic acquisition costs that Yahoo!'s Overture Services subsidiary pays to other online publishers as their share of Overture's pay-per-click advertising revenue.

But that consensus number may reflect some underpromising on the part of analysts in the expectations of some overdelivery. Deutsche Bank's Jeetil Patel, for example, forecast in a note Monday that Yahoo! would report revenue of roughly $520 million -- ahead of his own estimate of $503 million -- and EBITDA of $175 million to $180 million, beating his published $165 million prediction.

Typical of the warm feelings toward Yahoo! on the Street is a report issued last week by American Technology Research's Mark Mahaney, who initiated Yahoo! with a buy rating and a $64 price target. Citing a bullish outlook for Internet advertising, among other factors, Mahaney called Yahoo! his top buy recommendation among large-cap Internet companies -- for investors with a 12-month time horizon. (Mahaney's firm has no banking relationship with Yahoo!.)

One of the key factors driving Yahoo! is the growth of Internet advertising, writes Mahaney. He forecasts overall growth in 2004 U.S. Internet advertising of 30%, up from 20% growth in 2002, though behind the fourth-quarter 2003 year-over-year growth rate of 38%.

Branded advertising will grow 22% in 2004, Mahaney forecasts, up from 18% growth in 2003. Search ad growth -- through Yahoo!'s Overture subsidiary -- will be up 130% in 2004, thanks in part to local search and monetization of international search.

Yahoo!'s EBITDA margin, or earnings before interest, taxes, depreciation and amortization as a percentage of revenue, will rise from 32.2% in 2003 to 38.8%, ahead of the 35.6% that Mahaney terms the implied high end of the company's guidance. And just as the company beat earnings guidance last year, he expects that Yahoo! will beat the current consensus of 54 cents in earnings per share for 2004 by 5 cents.

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