to neutral from buy Wednesday, saying the 22% run-up in the stock since its third-quarter earnings release leaves it fairly priced ahead of various execution challenges.
The brokerage also raised its price target to $45 from $44, reflecting a price multiple of 50 over its 2007 earnings estimate and an enterprise value multiple of 22 over its 2007 estimate of earnings before interest, taxes depreciation and amortization. Yahoo! shed 55 cents, or 1.7%, to $39.64 in premarket trading.
UBS was mostly positive on Yahoo!'s main earnings initiatives, including paid search, the rollout of its Yahoo! Publisher Network and its push into content via Yahoo! Hollywood. The downgrade mostly reflects the strong performance of the stock, it said.
"The stock is near its five-year high, and we simply need to see execution on some key initiatives before we can get behind increasing our earnings estimates," UBS said. "We continue to believe that Yahoo! is exceptionally well positioned to capitalize on its media foundation within its rapidly evolving Internet space."
UBS said Yahoo!'s biggest opportunity for improvement is in paid search, where
has emerged as a dominant force.
"The company has essentially admitted that it must revamp its algorithms to take relevancy into account for sponsored links, but the process has been slow-moving," UBS wrote. "While we expect to see testing in the first half of 2006, real improvements that flow through the model will not likely come until the second half of the year. Having said that, we are positive on this initiative and we expect it will have a meaningful, positive impact once the changes are put in place."