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Yahoo! Dusts Itself Off

Shares climb again as analysts start calling off the dogs.

Shares of Yahoo! (YHOO) rallied for a second straight session Thursday after the recently bruised Internet giant was bolstered by a pair of strong analyst recommendations.

The vote of confidence comes at a key time as Yahoo! has been downgraded by four analysts this month.

Yahoo! was recently up 64 cents to $25.13, a gain of 2.6%, in midday trading. Shares are up almost 6% in the past two sessions after falling in the wake of

disappointing earnings results on Oct. 17.

Bank of America Equities initiated coverage late Wednesday on Yahoo!, rating the company a buy and setting a 12-month price target of $34 for the stock. Analysts Brian Pitz and Brian Fitzgerald believe that negative news is now priced into the stock, and that Yahoo! stands to benefit from the growth of online advertising. Branded advertising may surpass search in terms of growth rates, particularly as media buyers grow increasingly weary of click fraud.

"As consumers spend an increasingly higher proportion of their time online with various forms of content, we expect advertisers to continue allocating a higher proportion of their ad budgets online, particularly in branded advertising," the analysts wrote. "While we expect search to continue its strong growth trajectory, we believe that branded advertising may surpass the rate of growth in search in the second half of 2007."

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They also argued that the company will be rewarded for its efforts in social media and mobile devices -- two priorities that CEO Terry Semel stressed in an Oct. 17 conference call with investors. Benefits from the acquisition of Flickr, a social photo-sharing service Yahoo! acquired in December, may kick in and serve as an upcoming catalyst.

Meanwhile, Yahoo! maintains a strong position in local search and can expect to get a boost from strong growth in local and mobile advertising.

Elsewhere, Bear Stearns analyst Alexia Quadrani, who rates the company an outperform with a $32 price target for the end of 2007, was encouraged by a strong quarterly performance from Yahoo! Japan, which is 34%-owned by Yahoo!. The turnaround follows a rough year for Yahoo! Japan, and Quadrani notes that it "could boost the value of YHOO shares given its large stake in the company."

Other areas in Asia are also strong points for Yahoo!, which remains the world's most visited Web site. Bank of America's Pitz and Fitzgerald noted that the company "holds leadership positions in China, Korea, and Taiwan and will likely benefit from secular growth trends in advertising and eCommerce in these markets."

Quadrani also believes that Yahoo! is cheap at current levels. "YHOO shares are currently valued in line with slower-growth traditional media companies, which we believe is unwarranted given Yahoo's firm footing in the still high-growth online ad industry."

Both Bank of America and Bear Stearns are counting on Yahoo! to deliver a strong fourth quarter.

Bank of America has investment banking relationships with Yahoo! and Bear Stearns trades in Yahoo! stock.