Investors may have been in a punishing mood a day after



reported in-line profits and slightly disappointing revenue for its second quarter -- stripping away a tenth of the stock's value -- but analysts with a longer-term view were in a more forgiving frame of mind.

Looking at Yahoo!'s stock price, which was down $4.23, or 11%, at $33.50 in Wednesday trading, you might think that the premier Internet portal was heading for hard times. But Yahoo!'s earnings report didn't reveal cracks in its foundation that can cause investors to reduce their holdings in a stock.

Yahoo! delivered a 13-cent-a-share profit and revenue that grew 44% in the second quarter from the year-ago period. That was a bit below the 45% gain analysts had been forecasting, but it is still a growth rate that few companies as big as Yahoo! can boast of. And it's well above the 35% growth rate that researchers have projected for all Internet advertising in 2005.

So why the selloff? The whispering around Yahoo!'s earnings had been that it would beat its numbers, and it clearly didn't. Also, there had been mounting interest among momentum investors in Internet search stocks like Yahoo! and


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as both companies had been soundly beating the Street's numbers for the previous two quarters. Yahoo!'s in-line report may be chasing some of the momentum money out of the stock.

In the second quarter, Yahoo!'s search-related advertising grew more slowly than its branded advertising, such as banners and streaming ads. That's a direct reversal of the trends in the previous quarter. But Yahoo! CFO Susan Decker told

it happens every year. "It's not at all uncommon to see that kind of reversal as a seasonal factor this time of year," she says.

"Much like the second quarter last year, Yahoo! produced solid growth, yet short of the broader market expectations for beating estimates and guidance," says Safa Rashtchy of Piper Jaffray, which doesn't have an underwriting relationship with Yahoo!. The seasonal slowdown, he added, serves "as a reminder to be more moderate in our growth expectations."

And search-related ad spending will likely be seasonally slow in the third quarter as well. Many of the Internet's most avid users are students who are frequenting the Internet less during their summer vacations.

But the sluggish summer doesn't mesh with the expectations of some investors that search-driven stocks like Yahoo! and Google should not only beat expectations, but raise guidance -- and Yahoo! did neither. But the disappointment of such investors who had gotten ahead of themselves may present a buying opportunity for others.

"The quarter is likely to be viewed in a negative light, and given the overwhelming consensus view of 'beat and raise,' we would be opportunistic on weakness in the shares with a long-term time horizon, all else being equal," says Scott Devitt, an analyst at Legg Mason, which has no investment banking relationship with Yahoo!.

"Yahoo! is a phenomenal business, this has not changed," Devitt says. "However, perceptions could moderate based on last evening's results, presenting what we view as an opportunity."