Goldman Ups Google, Yahoo! Estimates

Fourth-quarter sales at Yahoo! ( YHOO) and Google ( GOOG) will beat Wall Street estimates thanks to strong advertising and paid search results, Goldman Sachs opined in a research note Monday morning.

The brokerage raised its fourth-quarter net revenue estimate on Yahoo! to $773 million and raised its 2005 estimate to $3.4 billion. Goldman's old estimate was for net revenue of $747 million and $3.3 billion. The current Thomson First Call consensus estimates are for revenue of $753 million in the quarter and $3.37 billion in the year.

Goldman also raised its estimate of Yahoo!'s earnings before interest, taxes, depreciation and amortization to $322 million from $309 million for the fourth quarter. It left its fourth-quarter earnings estimate intact at 13 cents a share. For full-year 2005, Goldman raised its earnings estimate by 2 cents to 59 cents a share.

On Google, Goldman raised its fourth-quarter revenue estimate to $592 million from $579 million and upped its earnings estimate to 76 cents a share from 74 cents a share. For 2005, Goldman left its revenue and earnings estimates intact at $2.93 billion and $3.47 a share.

"We believe that paid search is benefiting from both better-than-expected quarter-over-quarter growth in volume and pay-per-clicks due to the strong secular trends and the heightened ecommerce competitive environment," Goldman said. "Branded advertising has also continued its strong growth trend this quarter (up 30%-plus year-over-year) due to high levels of demand that resulted in a shortage of inventory on major portals."

The higher estimates reflect Goldman's conversations and channel checks during the weeks of Nov. 15 and Dec. 15 in which media buyers reported branded advertising demand in "full force."

"It's a heavy, heavy ad market," Goldman wrote. "The strength in online advertising demand did not appear to abate this quarter. In fact, our discussions with media buyers indicated that major portals had significantly more demand than supply during the quarter."

"The strength appears to be driven by increased spending by current advertisers and, to a lesser extent, net advertisers," Goldman said. "We believe that branded online advertising is thus beginning to transition from a test or trial marketing tactic for large branded advertisers to a more permanent component of the overall advertising/marketing mix."

Goldman rates both companies outperform and has received investment banking fees from both in the last year. In premarket trading Monday, Yahoo! was up 92 cents, or 1.4%, to $38.60 while Google rose $5.04, or 2.6%, to $197.83.

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