July 19 (Bloomberg) -- Yahoo! Inc. shares fell the most ever after the owner of the most-visited U.S. Internet site delayed the release of new advertising software and posted sales that missed analysts' estimates.

The stock tumbled 22 percent and dragged down shares of Google Inc. and EBay Inc. Analysts at J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. downgraded the stock. Piper Jaffray & Co. analyst Safa Rashtchy described the report as ``a major frustration.''

Yahoo, the second most-popular Internet search engine after Google, said new advertising software won't be released until at least the fourth quarter, a delay of three months. Sunnyvale, California-based Yahoo said second-quarter revenue was $1.12 billion, trailing the $1.14 billion average estimate of 30 analysts in a Thomson Financial survey. The results signal a bleak start to earnings season for Internet companies.

``It's disappointing on many levels,'' said Jordan Rohan, an analyst at RBC Capital Markets in New York. He rates Yahoo and Google ``outperform'' and doesn't own them. ``Yahoo's numbers, while not a clear read-through for Google, suggest that investor expectations for Google are stretched.''

Yahoo shares fell $7.04 to $25.20 at 4 p.m. New York time in Nasdaq Stock Market composite trading after trading as low as $25.04. The stock has fallen 36 percent this year.

Estimates Cut

The product delay is one of Terry Semel's biggest setbacks since he became Yahoo's chief executive officer in 2001, said Greg Sterling, an analyst at market researcher Kelsey Group Inc. in San Francisco. Semel, 63, was instrumental in turning around Yahoo by adding more content and overhauling its advertising sales after the Internet boom and bust in 2000.

Yahoo in May approved a bonus and retention plan for Semel with options for up to 9 million shares. The exercise price for 6 million of those shares is $31.59, 25 percent more than the closing price today.

Rohan today lowered his price target for Yahoo stock to $33 from $40 and cut his estimates for 2007 revenue. J.P. Morgan analyst Imran Khan cut his recommendation on Yahoo to ``neutral'' from ``outperform'' and said in a report that he sees no imminent events to help the stock. Deutsche Bank analyst Jeetil Patel cut his rating to ``hold'' from ``buy.''

``We're delivering within the expectations that we had, it's clear the market was a little bit ahead of those expectations,'' Susan Decker, Yahoo's chief financial officer, said in an interview. Profit of 11 cents a share met the average analyst's estimate.

EBay Results

EBay, the biggest online auctioneer, reported results today that met analysts' estimates and reiterated its full-year forecast. Google, the most-used Internet search engine, reports tomorrow. German software maker SAP AG and storage computer manufacturer EMC Corp. last week reported results that missed analysts' estimates.

Mountain View, California-based Google fell $4.05 to $399, and San Jose, California-based EBay slipped 66 cents to $25.93.

``Investors are returning to focusing on the fundamentals of these companies given the tough consumer environment, as well as the fact that the markets have been concerned about increased competition,'' said Henry Ellenbogen, who manages $1.1 billion at T. Rowe Price Group Inc. in Baltimore.

Yahoo's Semel told analysts that the introduction of new online advertising software, dubbed Project Panama, will be delayed because the company ``needs a little more time.''

Software Delay

``We underestimated how much time we need to make sure there's no stone uncovered and we felt like moving it back a quarter was the right thing to do,'' Decker said in the interview. Yahoo will conduct 20,000 tests on the new software that will help advertisers better target their ads, Decker said.

Yahoo's shares fell 4.5 percent in the three minutes after it reported results yesterday at 4:30 p.m. New York time. After a conference call with analysts, during which executives outlined the delays, the stock had fallen 14 percent.

Yahoo first disclosed details on its new advertising software at a meeting with analysts in San Francisco in May. J.P. Morgan's Khan said the benefits of the new software probably won't be seen until the end of 2007. Management ``loses some credibility due to the delay,'' Rohan wrote today in a report titled ``Panamawful.''

Credit Suisse analyst Heath Terry lowered his estimates for sales and profit for this year and next. Terry, in a note to clients today, wrote that he will keep his ``outperform'' rating on the stock.

Rewards Later

``As frustrating as the amount of time it is taking Yahoo to capitalize on the opportunity that exists in closing the search monetization gap, we believe the reward will be worth the wait,'' Terry wrote.

Yahoo forecast net sales of $1.12 billion to $1.23 billion for the current quarter, compared with a $1.2 billion average analyst estimate in a Thomson Financial survey. Yahoo still expects sales of as much as $4.85 billion for the full year.

That may be optimistic, Khan said in his note.

Yahoo's share of Web searches fell to 29 percent in June from 30 percent a year earlier, while Google's share rose to 45 percent from 37 percent, according to ComScore Networks Inc.

``I think they can turn the search business around but it will take longer than people expected,'' said Ben Schachter, an analyst at UBS AG in New York. He has a ``buy'' rating on the stock.

To contact the reporters on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net;

Last Updated: July 19, 2006 18:26 EDT