SAN FRANCISCO (AP) — Yahoo shares dropped Wednesday after Goldman Sachs advised investors to sell the struggling Internet company's stock.
THE SPARK: Goldman Sachs analyst Heath Terry depicted Yahoo as a perpetually misguided company that will have trouble competing against more innovative rivals that have been forging ahead with compelling products that are winning over consumers and advertisers.
Yahoo Inc. has spent much of the past three months evaluating whether it makes sense to sell all or part of the company, but Terry predicted the outcome of that review will probably aggravate already frustrated investors.
"The segment of management driving the company is intent on trying to revive Yahoo as a company, regardless of the cost to shareholders," Terry wrote in the Goldman Sachs report.
Yahoo declined comment on Wednesday. The company, which is based in Sunnyvale, Calif., has previously said its board' strategic review "is being properly managed for the benefit of all shareholders."
THE BIG PICTURE: Wall Street is running out of patience with Yahoo because it has been promising better times while going through three different CEOs since June 2007.
The company began its current reassessment after firing Carol Bartz as CEO in September because she hadn't engineered a turnaround during more than two years on the job. Her predecessors, Terry Semel and Yahoo co-founder Jerry Yang, didn't deliver on their promises, either. Tim Morse, Yahoo's chief financial officer, has been running the company on an interim basis since Bartz's ouster.
Yahoo still holds some appeal because its brand ranks among the best-known on the Internet and its website reaches a worldwide audience of about 700 million. But Yahoo's visitors are sticking around for shorter periods while rivals Google Inc. and Facebook have been coming up ways to cling to people longer.
That's one of the main reasons advertisers are spending more money with Google, the Internet's search leader, and Facebook, which operates the largest online social network. Facebook's success also inspired Goldman Sachs Group Inc. to put together a $1.5 billion investment in the privately held company earlier this year.
Meanwhile, Yahoo is losing market share, causing its revenue to droop even as advertisers increase their budgets for digital marketing.
It's gotten so bad that the most valuable parts of Yahoo aren't even in its operating business. Yahoo's Asian investments — a roughly 40 percent stake in China's Alibaba Group and a 35 percent stake in Yahoo Japan — are now considered to be the company's crown jewels. Goldman Sachs estimates Yahoo could bring in about $10 billion, after taxes, from a sale of its Asian holdings. That represents more than half of Yahoo's current market value of $18.6 billion.
Alibaba has publicly said it wants to team up with other bidders to buy Yahoo in its entirety, but Goldman's Terry doubts that will happen. The reasons: Yahoo's board doesn't seem interested and the deal's financing would probably be too difficult to pull off without Yahoo's cooperation, according to Goldman Sachs. Other analysts also believe U.S. lawmakers might raise objections to a buyout of a major communications service by a Chinese company.
THE ANALYSIS: Terry's unflattering opinion of Yahoo came in a report that painted a bright picture for the Internet sector as a whole next year. Goldman Sachs expects digital advertising to increase 21 percent from this year, boosted by accelerating usage of mobile devices.
Just don't expect Yahoo to join the party, according to Terry, who set a $14 price target for the stock with a "sell" recommendation.
"Yahoo simply faces too many competitive and structural headwinds to believe any kind of meaningful turnaround is possible," Terry wrote.
SHARE ACTION: Yahoo shares fell 40 cents, or 2.6 percent, to $15.02 in afternoon trading.