• by Wendy Davis  @wendyndavis, January 12, 2006

Merrill Lynch Wednesday cut Yahoo! from "buy" to "neutral," even as the brokerage raised both its overall forecast for online advertising and its revenue estimates for Yahoo!

The Yahoo! downgrade appears to stem, at least in part, from concerns about search revenue. "We, along with investors, continue to look for evidence of monetization improvements on Yahoo!'s paid search side of the business," wrote Merrill Lynch research analyst Lauren Rich Fine in her report. Fine also cited data by comScore showing that Yahoo!'s market share of search volume went down last year, while Google's increased.

Despite the more cautious outlook, Fine predicted that Yahoo! revenue would grow to $4.9 billion in 2006, marking a 32 percent increase from last year's estimated $3.7 billion. Merrill Lynch previously forecast that 2006 revenues would total $4.7 billion, or a 28 percent increase from last year.

In her report, Fine praised Yahoo! for its "diversity and position as a leading portal," and said the company should see growth this year based on "better search monetization, continued success of its branded advertising capabilities, and more [paying] subscribers."

She also predicted that Yahoo!'s fourth-quarter results will show strength in branded advertising. The company, she wrote, "will continue to live up to its name of being the online branded leader."

In a related report issued Wednesday, Fine predicted that search and rich media will propel online ad revenue to 5.7 percent of the total ad spend this year, marking 27 percent growth over 2005. But, despite the optimistic report, the report maintained Merrill Lynch's "neutral" rating on aQuantive, Digitas, and Google.