As Google (GOOG) - Get Report gets hotter, analysts' feet get colder.

On Monday, American Technology Research analyst Mark Mahaney downgraded Google to sell from hold, citing a variety of concerns about valuation and competition.

But rather than give up on the large-cap Internet advertising business going into third-quarter earnings season, Mahaney is proposing a short-term strategy of going long



shares while shorting Google's.

Mahaney's move follows

last week's downgrade of both Yahoo! and Google by Jefferies analyst Youssef Squali, who also based his downgrades on rich valuations rather than fundamental business concerns.

On Monday, Google's shares fell $2.40 to $135.33, while Yahoo!'s dropped 27 cents to $33.90. Since going public in August at $85, Google's stock has soared to as high as $139.88 -- a 64.5% gain in less than two months.

Yahoo! -- an Internet leader in both search-engine advertising and traditional, branded online advertising -- is slated to report third-quarter earnings after the market closes Tuesday, while search-engine operator Google is expected to report its first quarterly results as a public company on Oct. 21.

In his report, Mahaney argues that for high-multiple Internet stocks to trade higher on earnings news, they need to cleanly beat expectations and raise forecasts beyond consensus expectations. Yahoo! -- which has the business model most resembling Google's among large-cap Internet stocks -- is unlikely to have a "beat and raise" quarter, says Mahaney, so Google likely will trade downward on Yahoo!'s news. Additionally, because Google's management has indicated it won't provide guidance, the opportunity for upside potential at earnings time is limited.

Another concern about Google's stock, says Mahaney, is that it no longer trades at a discount to Yahoo!, as he has previously argued it should, based on Google's less-diverse revenue sources, its youth as a public company, its dual-class shares structure and other factors. Based upon the ratio of each company's enterprise value to Mahaney's estimate of 2005 earnings before interest, taxes, depreciation and amortization, the market was valuing the companies equally when he published his report.

Other negatives, says Mahaney, are the competitive and dynamic nature of online search, looming competition with


(MSFT) - Get Report

, and fears of momentum trading in the stock.

While a stand-alone short of Google is risky, says Mahaney, given the high short interest in Google as a percentage of the float, he is more confident about going long Yahoo! while shorting Google. In part, that's because Mahaney believes Yahoo! has more upside potential -- from branded advertising and fees revenue -- and less downside risk, given that same revenue diversity.

Following third-quarter results, says Mahaney, the market likely will return to valuing Google less richly than Yahoo!. Mahaney has a buy on Yahoo!; his firm hasn't done banking for either company.

Mahaney acknowledges, however, that his long-Yahoo!/short-Google pairs trade could go wrong. Google, for example, could have a blowout quarter, and things could turn out particularly bad for the trade if Google "dramatically" takes share from Yahoo! in the search-engine advertising business, or if Yahoo! has a disappointing performance in other business lines.

Google also could conceivably announce a stock split -- not a fundamental catalyst, says Mahaney, but one that could undercut the momentum of his call.