For Internet advertising supported stocks, the magic number looks like 2002.

Recent reports from

Merrill Lynch

and

ABN Amro

suggest that the online advertising market is indeed due for a recovery, but neither concludes that it will start with the fourth-quarter bounce-back that investors have been waiting for. Striking a pessimistic tone, ABN Amro analyst Arthur Newman says online advertising's recovery will likely lag that of the traditional media and may occur as late as mid-2002.

Most advertisers polled by Merrill in a recent informal survey say the percentage of their marketing budgets allotted to online advertising will grow over the next two years from their current 1% to 2% share. In addition, more than 70% of respondents said their overall ad spending would be up year-over-year in 2002, and none of them said they would cut ad spending in 2002. Those forecasts stand in contrast to the flat to lower spending they forecast for 2001.

"While we do not think we have necessarily hit bottom in terms of quarterly online spending totals, we do believe that we are in the bottoming process and that the future looks promising," write Merrill analysts

Henry Blodget and

Lauren Rich Fine.

The analysts say that once the dot-com spending implosion works its way through the online advertising system -- that is, by the end of the year -- online advertising should resume growth of 20% to 30% per year in 2002.

As for 2001, ABN Amro's Newman sees a sharp divergence between the performance of

AOL Time Warner

(AOL)

and everyone else in the online advertising business, including

Yahoo!

(YHOO)

. Online advertising as a whole will declining 13% in 2001, he says; take out America Online's performance -- he sees its share growing to 46% in 2001 -- and the online ad business declines 33% from 2000. (Newman has an add rating, his firm's second highest, on AOL Time Warner and a reduce rating on Yahoo!; his firm hasn't done underwriting for the companies.)

In cause for further concern, Newman points out that the online advertising market is heavily weighted toward the retail and financial services categories -- two industries, which, along with technology, appear to be pulling back from spending on traditional advertising. Newman also says that the practice of selling online advertising based on the number of times ads are displayed -- rather than the number of times consumers measurably respond to the ad -- is dying. That shift transfers risk from advertisers to Web publishers, he says, and suggests that ad rates may not recover from their recent drops.