After last quarter, Yahoo! (Nasdaq: YHOO) investors were probably ready for some good news. As you may recall, the company's shares got hammered after that disappointing quarter. Instead, there's yet more bad news -- the Internet giant has warned that its third quarter will take a negative hit from some slowing areas in online advertising.
Yahoo! said some weak growth in advertising sales to automotive and financial-services companies will put a drag on its third quarter. Sales for Q3 are now expected to come in at the lower end of its guidance.
Unveiling this news at a Goldman Sachs media conference, Yahoo! officials said the sluggishness in these areas is a new trend, so the company doesn't yet know whether this is part of a broader slowdown. By admitting uncertainty as to whether things are going to get worse, Yahoo! is not exactly dishing out any consoling sentiments.
Given the problems that Ford (NYSE: F) and General Motors (NYSE: GM) have been having, it's not too surprising that they might cut their online advertising. What's more, despite all of the glowing sentiment about Internet advertising over the past few years -- and it does seem to be emerging as a force to reckon with, in terms of consumer exposure and effectiveness -- it can't be consistently strong, especially in times of trouble. And the economy does indeed show signs of slowing down. If that's the case, companies will naturally decrease their advertising budgets.
No wonder so many investors are wondering how widespread this trend is and how much it will affect other Internet companies, most notably Google (Nasdaq: GOOG), which relies so heavily on Internet advertising revenues, and Microsoft (Nasdaq: MSFT), which has also wanted to take advantage of what has been an extremely robust online advertising market. (The fact that many unrelated Internet stocks are apparently also being hit by the Yahoo! news -- take Amazon.com (Nasdaq: AMZN), for example, -- is a rather strange turn of events.)
It is arguable that many of the issues surrounding Yahoo! have a lot to do with the overall economic picture. Yahoo! is still a marquee name on the Internet, despite all of the attention that Google, News Corp.'s (NYSE: NWS) MySpace, and YouTube get. In fact, when Tom Gardner recommended Yahoo! for Motley Fool Stock Advisor recently, he pointed out that it's a highly profitable company with a strong balance sheet and lots of business sectors that can excel over the long term on the Internet. The company does have plenty of services that come with entrenched users, and it's positioning itself in many of the Internet's most promising areas, including communications and entertainment.
Investors are admittedly having a hard time getting excited about Yahoo! lately, and today's news and subsequent stock plunge don't make things any easier. (Last quarter, longtime Fool Rick Munarriz seemed more bored than horrified about the company.) However, some of us believe that Yahoo! retains plenty of long-term strengths, regardless of some of the short-term concerns that are making investors nervous.
For more recent word on Yahoo!, see the following Foolish articles:
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Alyce Lomax
does not own shares of any of the companies mentioned.
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