Yahoo! Still Second Fiddle

Google's archrival is due to post earnings after the close.
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On Wall Street lately,

Yahoo!

(YHOO)

has been stuck playing the

Jan Brady role while

Google

(GOOG) - Get Report

preens as

Marcia.

But the one-sided popularity contest has narrowed at least a bit in 2006, giving hope to Yahoo! investors as the big Internet media property gets ready to post fourth-quarter earnings after the close Tuesday.

Yahoo! shares are up 3% this year as fans wax optimistic about the Sunnyvale, Calif.-based company's plans for mobile phones and search improvements. While that modest advance pales in comparison to Google's robust 12% year-to-date gain, the distance between the Web giants has closed from 2005, when Google shares more than doubled and Yahoo! shares ran in place, adding just 4%.

Analysts expect Yahoo! to make 16 cents a share for the quarter on net revenue, reflecting payments made to the company's search partners, of $1.06 billion. Those figures, culled from a Thomson Financial survey, represent a jump of more than 30% from a year ago.

"There are quite a few things to be optimistic about Yahoo!," says William Blair analyst Troy Mastin, who rates the shares outperform and whose firm makes a market in the stock. He sees "plenty of momentum behind advertisers realigning budgets to the Internet."

That wasn't always the case last year. In July, Yahoo! shares fell almost 10% in a day after the company missed sales estimates and offered guidance that disappointed Wall Street. For a fleeting moment the news even put a dent in Google's highflying shares, which in those days fetched a modest $312.

"People are used to

Yahoo! beating the quarter and raising expectations," says Mike Binger, who helps manage $700 million for Thrivent Financial, including shares of Yahoo! and Google.

Investors including Binger expect Yahoo! to benefit from the soaring popularity of search, but not to the same extent as Google. Yahoo! also is being helped by the continuing shift of advertising dollars from traditional media, including newspapers and television, to online companies, because it lets companies efficiently track their spending. Twenty-three analysts rate the stock a buy, 13 have it as a hold and one considers it a sell, according to Bloomberg data. Their average price target on the stock, which recently fetched $40 and change, is $44.72.

For some analysts, including Merrill Lynch's Lauren Rich Fine, the shares still aren't attractive. She argues that Yahoo!'s shares are trading in line with their trailing price-to-earnings ratio of 57.

Still, "With its plethora of online advertising/marketing services, content, communication services, access services, and wide audience reach, we continue to like Yahoo! for its diversity and position as a leading portal, leading to long-term consistency," wrote Fine in a note to clients Jan. 11.

Forrester Research estimates that U.S. search-engine marketing spending will hit $11.7 billion by 2010, a gain of 170% from 2004. Google, which gets more queries than the next four engines combined, had 39% of the search market in November. That's 5 percentage points more than it had during the same period a year earlier, according to comScore Media Metrix. Meanwhile, Yahoo!'s market share slipped 2.5 percentage points to 29.5%.

On the bright side, comScore estimated that Yahoo! got 49% of searches starting from toolbars, compared with Google's 46%. While this is "noteworthy," comScore adds that toolbar searches account for just 12% of total Internet queries. Keep in mind that Yahoo! entered the search advertising business only in 2003, with its $1.63 billion acquisition of Overture and its $235 million purchase of Inktomi. That's five years after Google started, which by Internet standards is an eternity.

Investors are going to be looking for updates on efforts that Yahoo! is making to improve its search, including Content Match, which helps customers target their ads based on the content of the Web page a user is reading. Last year, Yahoo! expanded its Content Match network, which had been geared toward larger sites, to smaller ones such as local newspapers and blogs, greatly expanding the distribution for these types of ads.

In addition, Yahoo! is broadening its ability to match advertisers to users who may be interested in their content. Companies will be able to have their ads come up in response to searches on terms that are related to the keywords that they purchased under improvements that Yahoo! is undertaking.

"There is a general expectation of seasonal outperformance by the company just given the fourth quarter and the increased seasonality of traffic because of retail-type searches that occur," says Scott Devitt, an analyst with Stifel Nicolaus who rates Yahoo! a buy and doesn't own the stock, in an interview.

In addition, Yahoo!'s push into mobile devices also is being well received by analysts and investors. Earlier this month the company's shares hit a 52-week high following the announcement of Yahoo! Go Mobile, a service that will allow users to conduct searches and access their email and photos as well as look at popular features such as news over cell phones. The company also will have its features pre-installed on some

Motorola

(MOT)

handsets.

And with Google's shares having reached their stratospheric heights and the talk on the company having turned so uniformly bullish, there are those who like Yahoo! because, rather than in spite of, the Jan Brady factor.

"If you are bullish on the Internet, but you are little bit skittish, you tend to play the safer bet -- which is Yahoo! over Google," says Martin Pyykkonen, an analyst with Hoefer & Arnett who rates Yahoo! buy.

To view Jonathan Berr's video take of this Yahoo! preview, click here.