Yahoo Tumbles On Weak Display Ads

There are several factors at work today in the sharp sell-off in shares of Yahoo (YHOO). The highlight, of course, is that the company’s first quarter results came in a little light of expectations, and the Street was less-than-enthused about the company’s guidance.

The big issue in the quarter was the weak performance in display ads. Mark May, an analyst at Needham who today downgraded the stock to Hold from Buy, notes that growth in the segment decelerated to 20% year-over-year from 25%-30% in the second half of last year. On a sequential basis, branded ads were down about 5%, according to UBS analyst Benjamin Schachter.

Almost all the analysts reports I’ve read on Yahoo today mention this point:

“We were disappointed by slower growth in display advertising,” wrote Jefferies & Co.’s Youssef Squali.

Brian Fitz and Brian Fitzgerald, of Bank of America, note that the company suffered a mix shift toward “lower priced non-premium inventory.”

Jim Friedland, of Cowen, asserts that advertisers are spending more on niche content sites, such as MySpace, Friendster and YouTube, “at the expense of Yahoo.”

Another big takeaway (to me anyway) is that Yahoo’s management team, already not one of the Street’s favorites, seems to have botched expectations this quarter. In short, CEO Terry Semel seems to have been a wee bit over-enthusiastic about the near-term performance of Panama and its ability to boost the company’s fortunes. “Positive feedback on Panama and upbeat comments from management intra-quarter created high expectations that were not met…Investors looking for a beat and raise quarter were disappointed,” writes UBS’s Benjamin Schachter.

A couple of other tidbits.

The headline on today's note from Morgan Stanley’s Mary Meeker reads: “Accelerating Growth Still the Story.” Now, I know Mary has her detractors, but I happen to think she remains one of the more insightful Internet analysts. But I think she’s missing something if she thinks the Yahoo story today is about accelerating growth.

The problems go beyond branded ads. As Schachter notes, search was down about 2% sequentially, and fees were down 4%. Friedland says fees revenue could come under further pressure next year “if Yahoo’s telco partners renegotiate their contracts, which we view as likely.”

The bulls are betting that Panama drives better performance in the second half. But the bears think the stock’s recent rise already discounts its benefits.

There could be more problems ahead in graphical ads. “An increase in addressable inventory may pressure CPM growth as advertisers are now in a more advantageous negotiating position, and we expect this trend to continue playing out in coming quarters,” writes Imran Khan, of J.P. Morgan.

Yahoo today is down $3.71, or nearly 12%, at $28.38.

YHOO 1-yr chart