Downgrade season whacks Net stocks

Downgrade season whacks Nets

Yahoo struggles; Portal Software slammed 60%-plus

NEW YORK (CBS.MW) — Internet stocks extended their downward course Wednesday as another downgrade of a major Net bellwether and negative calls on other Net names gave investors all the more reason to pack it up early ahead of the Thanksgiving holiday.

The Goldman Sachs Internet Index lost 9 percent, after losing 7 percent Tuesday. The Amex Internet Index gave up 6.7 percent.

Yahoo lost 8.4 percent to close at $38.19 following a downgrade to a “buy” from a “strong buy” at Thomas Weisel Partners.

Earnings to slip

Concerns that mighty Yahoo (YHOO) is losing momentum and could see a decline in quarterly profits sent shares down yet again.

The stock bounced around in the early going and rose as high as $43. But within half an hour of the trading session, Yahoo struggled, despite having already fallen 15 percent on Tuesday.

David Readerman, director of Internet strategy at Thomas Weisel Partners, lowered his rating on Yahoo due to the sluggish fourth quarter he anticipates.

Readerman lowered his fourth-quarter revenue projections by 2 percent to $310.1 million and fourth-quarter earnings by one penny to12 cents a share. That’s down from 13 cents earned in the third quarter.

Other portals such as Ask Jeeves (ASKJ) About.com (BOUT)), Terra Lycos (TRLY) and America Online (AOL) followed Yahoo’s lead downward.

Recall, Morgan Stanley analyst Mary Meeker expects Yahoo to generate $316 million in revenue and post a 13 cents share profit.

Many industry observers aren’t raising eyebrows at the downgrades as they expect most Street analysts have no choice but to stay ahead of the curve or ahead of the trend. And this trend happens to be down. Readerman, however, qualified his call by saying that it wasn’t a “market-timing” decision.

Weak demand

Portal Software (PRSF) lost 63.8 percent to $6.75 and pulled down Internet infrastructure stocks. The Internet billing software company reported lower-than-expected license revenue due to weak demand from carrier customers.

Banc of America, Goldman Sachs and Robertson Stephens lowered their ratings on the stock.

The news forced down components in Merrill Lynch’s Internet Infrastructure Holdrs (IIH) plunged 16.1 percent in recent trading. It had fallen as much as 21 percent earlier in the session.

BEA Systems (BEAS) fell $7.94, or 13 percent, to $53.06; VeriSign (VRSN) lost $7.50, or 8 percent to $86.56; Exodus Communications (EXDS) gave up $2.25, or 13 percent, to $22.81; and Inktomi (INKT) slid $7.88, or 21.7 percent, to $28.38. The latter three closed down at 52-week lows.

A little holiday cheer

Online retailer Amazon.com (AMZN) and auctioneer Ebay (EBAY) were among the few Net stocks to post gains Wednesday. Both firms stage impressive staged comebacks after posting losses earlier in the session. The reversals came around the time that the Gore campaign was dealt a setback in Florida, prompting ABN AMRO analyst Kevin Silverman to downplay any connection to the election.

Instead, Silverman focused upon the proximity of the holiday season.

“I think some people have figured out that Christmas is going to come this year and that the latest numbers are showing consumers continue to migrate online,” he said.

“In my view, there is very little doubt of a great online performance this holiday season.” Silverman said the growth is likely to be centered in established online brands, like Amazon.com and Ebay, and the well-known brick and mortar names that are set up to do business on the Internet.

“The strong brands that have moved online are doing well,” he said, citing Sears (S) and The Gap (GPS) as examples.

Amazon.com jumped 4 percent to $25.19. Ebay gained 4.2 percent to $32.88.