When Citigroup Smith Barney analyst Lanny Baker cut his rating on Yahoo! ( YHOO) last week, he got a lot of attention for standing out from the crowd.

But when it comes to how he expects the company's stock to perform, he actually has a lot of company.

Shares in Yahoo!, which is set to report second-quarter earnings after the markets close Wednesday, have surged since the company reported unexpectedly good first-quarter results.

While the run-up inspired Baker to downgrade Yahoo! on valuation concerns -- a move that helped spark a retreat in Yahoo!'s stock price -- the majority of analysts writing on Yahoo! in recent days have been more bullish on the stock, keeping or even raising their positive ratings. They argue that the growth in Yahoo's revenue and earnings, supported by the Internet advertising comeback, justifies even further appreciation in the company's stock.

And yet most of those analysts have target prices for Yahoo! at or below Baker's $36. Notably, Baker raised his goal for Yahoo! shares, from $33, even as he cut his rating from buy to hold. (Baker is long Yahoo! stock; his firm has done recent non-investment banking services for Yahoo!.)

The debate over Yahoo!'s valuation -- whether its price/earnings ratio of 100 (based on 2004 estimates) is borne out by such factors as the 36% earnings growth expected for 2005 -- is awfully reminiscent of the situation during the turn-of-the-century dot-com bubble.

Back in early 2000, when Yahoo! was peaking above $100 on a split-adjusted basis, the belief -- subsequently disproved -- was that the online advertising market had nowhere to go but up.

Following the burst of the earlier bubble, a more reasoned optimism has returned to the Internet advertising market. The new wave has been driven by the growing popularity of pay-per-click search advertising and that advertising medium's adoption not by fledgling e-tailers but by Old Economy heavyweights.

Yahoo! wave subsides

The question facing Yahoo! analysts is whether this new brand of less-giddy, more-staid optimism is still too optimistic nonetheless.

Yahoo!'s shares fell 96 cents Tuesday to trade at $32.98. Despite the pullback from last week's highs, that's still 36% over where the stock was trading before the first-quarter results prompted this latest surge in Yahoo!'s stock.

For this quarter, the Thomson First Call expectation is that Yahoo! will report earnings of 8 cents per share on revenue of $610 million. As is the custom among Yahoo! and its analysts, that headline revenue number excludes traffic acquisition costs paid by Yahoo!'s subsidiary Overture Services. That's the ad revenue that Overture shares with third-party Web sites for the privilege of running Overture's pay-per-click search engine results.

The First Call mean estimate for earnings before interest, taxes, depreciation and amortization (or EBITDA) -- also known as operating income before depreciation and amortization (or OIBDA) -- is $224.5 million for the quarter ended June 30.

For the full year, the expectations are for $2.53 billion in revenue, 33 cents in earnings per share and OIBDA of $956 million.

Typical of the lower-profile caution about Yahoo!'s valuation is a report issued Tuesday morning by Mark Mahaney of American Technology Research. In the wake of Yahoo!'s close at $33.94 Friday, Mahaney wrote, "Here we are at $34, knocking on our $34.50 price target ... and we would not be buying these shares into the numbers. We would look to be more opportunistic, looking to add to a core YHOO Long position closer to $30." Mahaney has a buy rating on Yahoo!'s stock.

Not much more optimistic than Baker is J.P. Morgan analyst Imran Khan, who has a buy rating and a $37 price target.

As far as further stock appreciation is concerned, one of the most optimistic Yahoo! analysts appears to be Credit Suisse First Boston's Heath Terry. In a June 22 report entitled "Up 40% and Undervalued," Terry argues that online advertising is growing faster than expected, driven by a quicker-than-expected pricing increase for traditional online advertising and a slower-than-expected deceleration in the search business.

Raising his estimates for Yahoo! this year and next, Terry raised his second-quarter revenue forecast from $615 million to $628 million, and his full-year revenue forecast from $2.5 billion to $2.7 billion. CSFB has done banking for Yahoo! in the past year.

Meanwhile, the rest of the Net sector has faded as the summer heat has rolled in. Though some rivals rose sharply in the second half of 2003 through early this year, Yahoo!'s rally has been of little help to other search-engine companies. While LookSmart ( LOOK) is up 5% since Yahoo!'s first-quarter earnings announcement, shares of Ask Jeeves ( ASKJ), FindWhat.com ( FWHT) and Mamma.com ( MAMA) are all down.

On the other hand, interest continues to build in the impending initial public offering for Google. The auction-style IPO for Overture's chief rival is expected later this year.