• by Mark Walsh  @markfwal, October 9, 2008

With the financial markets in freefall, UBS analyst Ben Schachter on Thursday lowered his third-quarter and 2009 estimates for Internet companies that depend on online advertising and consumer spending.

While reducing earnings projections and price targets for Yahoo, Google, ValueClick and eBay, the UBS analyst considers Google the best-positioned to weather the economic downturn because of continued demand for search advertising.

While the first two months of the quarter were decent, he said in a research note that "we believe September was difficult," citing a softening display ad market.

And although ad budget cuts will affect both online and offline spending through 2009, "we think that the continuing shift to online will be somewhat accelerated by the macro weakness," wrote Shachter. The following are summaries of his third-quarter outlook on the four Internet companies covered in the report.

Google

"Due to its exposure to highly measurable and accountable search advertising, likely held up better during the quarter, and we expect its 3Q results will likely be slightly below consensus expectations." A lack of significant improvement in monetization during the quarter and broader economic conditions add downside risk, but UBS still recommends as long-term buy. Price target cut: $700 to $525.

Yahoo

Concerns about executing on its core ad business and softness in display advertising remain, "but we still think that there is money to be made with this stock in the longer-term." Yahoo will either sort out its issues and turn things around, new management will come in and "right the ship," or the company will be acquired--most likely by Microsoft, which UBS still believes to be the most likely outcome. Price target: $28 to $20.

ValueClick

The ad services company is getting hit by the overall decline in online advertising, especially in relation to its comparison-shopping and lead-generation businesses. "While the company is proactively moving to try and protect margins and buy back stock, we believe the fundamental businesses will continue to be impacted by forces beyond its control." Questions remain about a possible tie-up with AOL and/or Microsoft. Price target: $13 to $8.

eBay

UBS describes eBay as being in the midst of an identity crisis. While the company wants to maintain its heritage as the online marketplace for used and collectible goods, "it also clearly wants to compete in fixed price listings to spur growth in its core." How the deteriorating economy is affecting eBay's payment business (both on and off the site) is a key question. UBS expects "meaningful contraction" in its core auction business in 2009. Price target: $28 to $18.