"In 2009, one of the hardest hit Internet sectors has been display advertising. At Yahoo, owned-and-operated display advertising revenues were down 12% in the first three quarters of 2009 and accounted for roughly 25% of gross revenue in third quarter (and a substantially higher percentage of profitability). Thus, we think a recovery in display advertising dollars could be a catalyst for Yahoo's stock," the analysts wrote, noting that positive signs are mounting, including an improvement in key vertical ad categories, such as automotive and finance, which account for roughly 25% of Yahoo's online advertising revenue.
"Revenue from those two verticals was down more than 15% during the first nine months," the researchers noted, adding, "However, based on our industry checks, we think auto and finance advertisement trends are improving in the fourth quarter. Additionally we think the comps are getting easier. Therefore we think our owned and operated display advertising estimate for 1.5% growth in fiscal 2010 could be too conservative."
Another positive sign for Yahoo is the fact that big premium publishers are shifting their focus to "price integrity," which JPMorgan said should help bolster Yahoo's display advertising business, as well. Specifically, the analysts cited Time Warner's spin-off of AOL, and reports that CBS plans to discontinue selling its premium online ad inventory via third-party ad networks.
"We believe these moves by larger publishers will improve price integrity for the display advertising market as a whole," the analysts wrote. "Considering Yahoo is the largest display ad publisher, we see it as a likely beneficiary of pricing improvements."