A Wall Street analyst cut Yahoo's 12-month price target to $24 a share on Wednesday, citing a worsening economic climate and storm clouds on the horizon for future earnings growth.
Previously, Yahoo's 12-month price target was set at $26 a share by Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co., based on the controversial Yahoo-Google advertising search deal going through.
That report did little to cheer Yahoo's stock, which fell as low as $17.25 a share in early morning trading.
In the Sanford report, Lindsay said:
Our new valuation is based upon our pessimistic outlook for GDP and earnings growth but assumes no further short term dollar appreciation, which we now think is less likely following the recent government bail-out of Freddie Mac and Fannie Mae and the likely downward impact this will have in interest rates and the U.S. currency.
While Lindsay's current expectations call for Yahoo's stock to rise to $24 a share in the next 12 months, he notes it's based on Yahoo and Google going forward with their advertising deal.
But Lindsay points out that without such a deal, he places Yahoo's 12-month price target at only $21 a share. And he further notes that recent reports indicate the deal is receiving greater scrutiny by the government with the addition of an outside antitrust litigator.
And on the other side of the spectrum, a similar ad outsourcing deal with Microsoft could push Yahoo's price to $26 a share in a 12-month period, Lindsay noted.
Although Google monetizes paid search better than either Yahoo or Microsoft, outsourcing to Microsoft is a better option for Yahoo shareholders for two reasons: (a) Yahoo can likely only outsource a minority of its search business to Google to ensure that the deal passes regulatory muster; and (b) Yahoo must also still incur the cost of maintaining its own operation--the former Project Panama. In a deal with Microsoft, however Yahoo could potentially outsource 100 percent of its paid search activities and could also eliminate the cost of maintaining its own paid search operation.
And a sale of Yahoo's search business to Microsoft?
Lindsay puts that figure potentially at $27 a share.