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Yahoo! Fractures the Faith

The stock tumbles as growth questions reassert themselves.

Talk about a rude awakening.

Shares of



were pummeled Wednesday as investors reacted to the disappointing first-quarter earnings the company announced the day before.

Yahoo!'s stock was off nearly 12% to $28.35 after reporting quarterly revenue that fell short of analyst estimates. But for Yahoo!, which had seen its shares run up 25% this year amid strong reviews for its new ad platform and speculation that the company may actually raise guidance for the second quarter, the lackluster results proved especially devastating.

Shares of Yahoo! had surged 40% from lows hit last October.

Far from seeing the impact of the company's new Panama search platform on the bottom line, Wall Street instead started to wonder where future growth would come from following Tuesday's outlook.

"You are growing revenue 9% right now. You are looking for mid-20s by the end of the year," Goldman Sachs analyst Anthony Noto asked during the company's conference call with investors. "How do we bridge that gap?"

And while Yahoo! continued to be bullish about the impact of Panama over the long term, it also hinted at concerns abut the display ad business that has been a bastion of strength so far. During the its fourth-quarter conference call with investors in January, Yahoo! CEO Terry Semel said the company aimed to extend its lead in the display ad business -- and again grow faster than the rest of the market in 2007.

For Jim Cramer's take on the company discussed in this article, please click here

for his Wall St. Confidential video.

But during Tuesday's conference call, Semel said that "we expect that this year our growth will be broadly consistent with the U.S. display market," implying a scaling back of the company's ambitions. "Longer term, we intend to outpace the growth of the market," Semel said.

A display-ad pullback would be limited to "a couple of hundred basis points," Yahoo! CFO Sue Decker said in an interview, moving Yahoo!'s growth predictions back to what it had forecast in the third quarter of last year.

Still, the company's soft guidance for the display sector raised concern with analysts. "We are getting into a seasonally strong quarter for graphic advertisement, and I think Terry, you talked about how you will see improvement in revenue per search," JP Morgan analyst Imran Khan said during the call. "But if I look at the guidance, on the low end you are only guiding 1.4% sequential growth."

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While growing revenue per search thanks to the Panama system seemed to have been priced into Yahoo!'s stock,

a slip in the display market may not have been. That risk is further heightened by


(GOOG) - Get Alphabet Inc. Class C Report

purchase of ad-technology company


on Friday, which would bring a major player into the display ad market, where Google had in the past lacked large amounts of online ad space to sell to advertisers.

Semel downplayed Google's acquisition during the conference call, saying that it served to validate Yahoo!'s strategy of stressing the importance of display ads to online advertisers. But Google's move has the potential to hit Yahoo! hard, as the search giant has clearly stated that it intends to use its dominance in the search ad market to muscle into display ads.

Google intends to link the two mediums and give advertisers one platform to manage both budgets. This new approach could tilt advertiser online budgets away from Yahoo! and toward Google.


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, which lost the bidding war for DoubleClick, also may remain bent on entering the market and

put further pressure on Yahoo!.

Decker said Yahoo! also provides advertisers with tools to manage display and search campaigns in concert.

Yahoo! also plans to draw attention to some of its accomplishments by launching its own on- and off-line media campaign. The effort will highlight Panama, Yahoo! mobile service, and Yahoo! Answers, a service that lets users pose questions to Yahoo!'s online community.

For investors, however, the new features may take a backseat to Yahoo!'s progress in the display ad business that contributes so heavily to revenue.