Low expectations for

Yahoo!'s

(YHOO)

second quarter helped save the stock from a selloff, but the forgiveness from investors may only be temporary.

Shares of Yahoo! were up 4.2% one day after it missed Wall Street estimates. Although the tech giant faces the same economic headwinds plaguing other Internet companies including

Google

(GOOG) - Get Report

, which last week also missed estimates and saw its stock plunge, investors gave Yahoo! a free pass in light of all the distractions in the second quarter, including a possible

Microsoft

(MSFT) - Get Report

takeover and a proxy fight with billionaire investor Carl Icahn ahead of its Aug. 1 shareholder meeting.

"Frankly, I think Yahoo!'s ability to perform is especially impressive in light of the extraordinary events surrounding the company this year," said Chief Executive Jerry Yang during Tuesday's conference call with analysts.

In any other light, Yahoo!'s performance was decidely poor. Second-quarter profit was down 18.6% vs. last year in the same period on a GAAP basis, and revenue grew by only 8% excluding traffic acquisition costs.

Lehman Brothers analyst Douglas Anmuth noted in his research that while the company's results weren't quite as bad as everyone had feared because of the distractions, Yahoo! must now put its focus on its fundamentals.

"We believe Yahoo needs to strengthen core operations for the stock to work, but we think it also needs to re-engage with investors, many of whom have viewed the company as an M&A and arb story over the last several months rather than a fundamental investment opportunity," he said.

Yahoo!'s stock has been on a roller-coaster ride ever since Microsoft proposed to take it over on Jan. 31. Shares soared when a deal seemed inevitable, but then plummeted when it collapsed. Yahoo! also rejected an alternative deal to give up its search business. Instead, it agreed to outsource some of its online search ads to Google.

On Monday, Yahoo! managed to fend off a proxy fight with Icahn by reaching a compromise that would allow him three seats on an expanded board while holding on to eight of its current members, including Yang.

"Overall, we believe second-quarter results and the recent settlement with Carl Icahn provide Yahoo! with a little bit of breathing room in the near term," Anmuth said. "But we believe there is still significant pressure to perform in the back half and to potentially take action to enhance shareholder value."

Yahoo!'s display ad business -- a crucial part of its revenue stream -- grew by 20% in the second quarter, down from 25% in the first quarter. Its query growth in the U.S. was up more than 11% vs. a year ago.

Categories such as finance, retail and travel experienced weakness, and the company also saw a shift from brand-based advertising to performance-based advertising.

Analyst Jeffrey Lindsay of Sanford Bernstein noted that in the past year, unique visitors to Yahoo! sites have grown almost 11%, but the majority of this growth came from Europe and Asia-Pacific.

He further pointed out that despite the increase, the total number of global page views has actually declined 5%.

"This fall does not bode well for the company, as page views have a direct correlation with the number of display ads viewed," he wrote in his research.

Lindsay said he is also troubled by Yahoo!'s burgeoning headcount, which the company had tried to stem in the past, only to see it back to its fourth-quarter level, totaling 14,300 employees. The company hired more than 500 in the second quarter alone.

"Yahoo!'s revenues and margins per employee are significantly lower than those of its key competitor Google, and we think the only long term remedy is to reduce staff -- potentially by up to 25%," Lindsay said. "We think that Yahoo! found it very painful to cut head count by 1,000 earlier this year and has already forgone the benefit of this action by allowing management to hire the same number back within two quarters."

Yahoo! lost a lot of its top talent in the midst of its negotiations with Microsoft, but Yang on Tuesday made it a point to note that the company has been aggressively hiring again.

Youssef Squali, an analyst for Jefferies, described Yahoo!'s second quarter as "neither weak enough for the stock to drop materially, allowing Microsoft to swoop in for the kill, nor strong enough to give Yahoo! management boasting rights about the strength of their business and the need for a higher take-out valuation."

He expects Yahoo!'s new board to push for an aggressive share repurchase and to also explore the sale of its Asian assets, all while still negotiating with Microsoft, "which we still believe ultimately buys the company."