July 11 (Bloomberg) -- Yahoo! Inc. lost the battle with Google Inc. in searching the Internet and now may have jeopardized its lead in display advertisements.

Even a new chief executive officer and head of sales may not be able to prevent social-networking sites MySpace and Facebook Inc. from eroding Yahoo's revenue from the banner ads that make up about 40 percent of the company's sales.

Yahoo, boxed in by Google in search and by newer competitors elsewhere, hasn't been able to develop original products that will give it an unassailable position. With co-founder Jerry Yang installed as CEO three weeks ago and the stock trading 39 percent below its five-year high, Yahoo shares look cheap to 18 analysts who rate the stock ``buy.'' They may get even cheaper.

``It's very possible the stock could go down,'' said Scott Kessler, an analyst at Standard & Poor's in New York who rates the shares ``hold.'' ``People are coming to the conclusion that the recent changes will cause some kind of stock appreciation and operational improvement. I just don't see it.''

Shares of Sunnyvale, California-based Yahoo fell 28 cents to $26.69 at 4 p.m. New York time on the Nasdaq Stock Market. They trade at 5.7 times sales, less than half the 13.9 times sales of rival Google.

That's no bargain, says Ken Smith, director of technology investment at Munder Capital Management in Birmingham, Michigan, which oversees $28 billion. In the nine months through March 31, Smith cut the Munder Internet fund's stake in Yahoo by 45 percent to 593,580 shares.

``I wish we had sold it a year ago,'' Smith said in an interview. He declined to discuss transactions beyond the filings or to discuss future plans.

Falling Behind

At 22 percent sales growth last year, Yahoo expanded at less than one-third the rate of Mountain View, California-based Google. It also failed to match the industry's 36 percent rise in global Internet advertising, calculated by Merrill Lynch & Co.

Analysts were slow to withdraw support. Last year, when the shares fell 35 percent, there were six upgrades compared with seven downgrades, according to data compiled by Bloomberg. At least eight brokers, including Merrill Lynch and Goldman Sachs Group Inc., have cut ratings this year, leaving 17 with ``hold'' recommendations and four that say ``sell.''

Thirteen of the remaining ``buy'' ratings have lost money for investors since the initial recommendation.

Yahoo ceded the Web-search business to Google in 2000, agreeing to use its rival's query results. By the time Yahoo bought Overture Services Inc. and Inktomi Corp. in 2003 to create its own search engine, Google's lead was established.

`Seeing Shifts'

Under Terry Semel, who became CEO in 2001 and is now chairman, Yahoo branched into music and video. Apple Inc.'s iTunes surpassed Yahoo's music sites in usage and Google bought YouTube, the leader in online video.

Yahoo also missed out on buying social networking companies. Rupert Murdoch's News Corp. bought MySpace in 2005 for $580 million, and Facebook rejected a $1 billion offer from Yahoo last year.

Now those upstarts are cutting into sales of display ads, which include short videos, animation and billboards. Yahoo said June 18 that second-quarter sales will be at the middle to low end of its forecast because of slowing display growth.

Year-to-year sales growth in the category decelerated from 38 percent in the first quarter of 2006 to 20 percent in this year's first quarter and less than 10 percent in the second quarter, estimates Jefferies & Co. analyst Youssef Squali, who is based in New York and rates the shares ``buy.''

``We're seeing some shifts,'' Yahoo spokeswoman Joanna Stevens said. ``Advertisers have started to experiment with different forms of display advertising.''

MySpace, Facebook

Goldman Sachs estimates Yahoo's display advertising sales rose 18 percent in the first quarter to $467 million. Yahoo doesn't break out the amount of ad revenue by category.

MySpace, part of News Corp.'s Fox Interactive unit, and closely held Facebook, based in Palo Alto, California, will grab three-quarters of social-networking revenue this year, according to New York-based researcher Emarketer Inc.

Social networking is gobbling a bigger chunk of online display advertising. The U.S. market will more than double to $900 million in 2007, compared with a 13 percent rise for all online display ads, and reach $2.5 billion in 2011, Emarketer estimates.

``Every ad dollar MySpace and Facebook take is a dollar that in the past would have gone to Yahoo,'' said Munder's Smith.

Left Out

Yahoo's biggest competitors in search have latched onto the two networking leaders -- Google has an advertising alliance with MySpace and Microsoft Corp., operator of the No. 3 Internet search engine, partnered with Facebook.

Yahoo's home-grown social-networking site, Yahoo 360, had 2.12 million U.S. users in May, a 38 percent decline from a year earlier, according to New York-based Nielsen//NetRatings. MySpace had 56.6 million users, up 35 percent, and Facebook jumped 85 percent to 14.2 million.

Many of Yahoo's other features and services are ``me-too'' products that compete against similar rivals, Kessler said. The company's e-mail, photo-sharing, mapping and instant-messenger services all face comparable offerings from Google and Microsoft.

``Display is the crown jewel of the company,'' Munder's Smith said. ``I don't think they can reverse that slide.''

Yahoo still takes in more display advertising than its competitors, Stevens said. Measured by dollars spent, Yahoo was first among U.S. sites in the first quarter, followed by AOL and parent Time Warner Inc. and Redmond, Washington-based Microsoft is third, according to TNS Media Intelligence. TNS didn't provide year-ago comparisons.

Yang's Plans

Yang, named CEO last month, lacks the management experience to turn around a company of Yahoo's size, said analyst Anthony Valencia at TCW Group Inc. in Los Angeles, which oversees $160 billion, including Yahoo shares. Through spokeswoman Helena Maus, Yang declined comment.

``He's been part of our leadership since the beginning of Yahoo,'' Stevens said. ``He's also got clear ideas of what needs to get done in order to drive Yahoo to its next phase of growth.''

Yang said in June that he plans to hire engineers and improve the company's technology to compete against Google. At the time of the changeover, Semel called Yang and President Susan Decker the ``perfect combination'' to lead Yahoo forward.

``Jerry is a visionary,'' said Rob Solomon, CEO of travel site SideStep Inc., in Santa Clara, California, and a vice president at Yahoo from 2000 to 2006. ``It's smart to have a technology guy at the head of this company right now.''

More Visitors

Yahoo also attracts more users than its competitors. Its U.S. sites had 130.5 million unique visitors in May, compared with 120 million at Google, and more than Fox sites and Facebook combined, according to ComScore Inc. in Reston, Virginia.

The Flickr photo-sharing site is popular and Yahoo is a top spot for visitors looking for news, financial data and sports. Yahoo Answers, which lets people post and answer questions online, had 18.4 million U.S. users in May, almost triple its year-ago total, according to Nielsen.

Yahoo also agreed in April to buy the 80 percent of Internet ad auction company Right Media Inc. it didn't already own for $680 million to sell ads on other Web sites.

A new ad program called Panama, designed to capture search advertising, started in February and is boosting revenue per search faster than expected, Decker said last month.

`Big Bets'

Since becoming CEO, Yang has altered Yahoo's sales process to centralize search, banner and video advertising, a move meant to address longstanding customer complaints. He put David Karnstedt, who oversaw search ads, in charge of North American sales, replacing Wenda Millard.

Previously, each ad buy was negotiated separately, making purchases ``exhausting,'' said David Kenny, chairman of advertising company Publicis Groupe's Digitas unit in Boston. He said clients have shifted spending to Web sites of television networks such as NBC and CNN and are experimenting with Facebook and MySpace.

A revival at Yahoo will require ``a few big bets,'' said Mark Kingdon, chief executive officer of Organic, a San Francisco-based ad agency owned by Omnicom Group Inc. ``They should bet on different horses than Google.''

One possibility emerged last month, when news agencies reported that News Corp. discussed trading MySpace for a 25 percent stake in Yahoo. The talks were tentative and occurred before Yahoo's executive changes, the Times of London reported.

Spokeswoman Stevens said Yahoo doesn't discuss rumors and is ``constantly talking to companies about partnerships.'' News Corp. spokesman Andrew Butcher declined to comment.

``Their challenge is to find a unique element that defines their future direction,'' said Mark Cuban, the billionaire owner of basketball's Dallas Mavericks who sold Broadcast.com to Yahoo in 1999. ``They have to be themselves.''

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Ari Levy in San Francisco alevy5@bloomberg.net.

Last Updated: July 11, 2007 16:22 EDT