SAN FRANCISCO (AP) - Yahoo Inc.'s stock price plunged by more than 20 percent Wednesday, shoving the shares to their lowest level in more than two years as investors punished the Internet powerhouse for postponing a pivotal change to the advertising formula that propels its profits. The Sunnyvale, Calif.-based company jarred Wall Street with the unexpected delay late Tuesday after announcing solid second-quarter results that matched analyst estimates.
Investors quickly showed their dismay Wednesday as Yahoo's shares plummeted 21 percent to as low as $25.38 on the Nasdaq Stock Market. That marked the stock's lowest point since it traded at a split- adjusted $25.34 in May 2004.
By early afternoon, the shares were down $6.48, or 20.1 percent, at $25.76 on the Nasdaq. The slide wiped out $9.6 billion in shareholder wealth.
Here's Yahoo's problem as Wall Street sees it: the owner of the Internet's most trafficked Web site keeps raking in more money as advertisers continue to shift their spending online, but it still lags well behind search engine leader Google Inc.
And now it looks like Yahoo won't be closing that gap as soon as management had promised.
"I can sense the frustration of investors," said Piper Jaffray analyst Safa Rashtchy. "It's discouraging and disheartening, especially because Yahoo didn't really give a good reason for the delay."
Rashtchy is maintaining his "outperform" rating on Yahoo's stock, although he lowered his 12-month target for the shares from $42 to $36.
Other analysts weren't as forgiving. For instance, JP Morgan Securities analyst Imran Khan downgraded Yahoo's stock to "neutral" and expressed doubts whether the company will even be able up to live up to its financial projections for the rest of the year. He also believes Yahoo is destined to fall further behind in its technology race with Google, which will provide an update on its progress Thursday when it is scheduled to release its second-quarter results.
Yahoo's bad news also appeared to dampen hopes for Google, whose shares fell $5.15, or 1.3 percent, to $397.90 during Wednesday's afternoon trading on the Nasdaq.
Despite Wednesday's harsh backlash against Yahoo, it's not like the company is struggling.
The company earned $164.3 million, or 11 cents per share, during the three months ended in June. That a 78 percent drop from the second quarter of 2005, when Yahoo earned $754.7 million, or 51 cents per share.
But the sharp decline is deceiving because Yahoo realized a $552 million windfall in last year's quarter by selling its remaining stake in Google. New accounting rules also required Yahoo to deduct the cost of employee stock options from its profit, something it didn't have to do last year.
Revenue for the second quarter totaled $1.58 billion, a 26 percent improvement from $1.25 billion last year. After subtracting the commissions Yahoo paid to other Web sites in its advertising network, revenue stood at $1.12 billion, up 28 percent from last year.
Numbers like that are just one of the reasons market observers like ThinkEquity Partners analyst Stewart Barry view Yahoo's stock as a bargain right now.
Wednesday's sell off probably would not have been as severe if Yahoo Chairman Terry Semel and his management team hadn't decided to delay a much-anticipated change in the company's formula for displaying ad links by one to three months.
Investors have been eagerly awaiting the new ad platform, hoping the improvements would enable Yahoo to do a better job displaying short ads. The clicks on those ads, which typically appear as text on the top and sides of Web pages, are critical because they trigger commissions for Yahoo and its partners.
Google's financial growth during the past two years has outstripped Yahoo's partly because it has developed a better formula for determining which ads to display alongside search results—an advantage that even Semel concedes.
"We are not monetizing as well and it is costing us a lot of money," Semel said Tuesday in an interview.
Yahoo now doesn't expect its new approach to be fully deployed until early next year. In May, Yahoo said it planned to start rolling out the changes in the third quarter and complete the process in the fourth quarter.
Semel said Yahoo didn't want to risk a hiccup as advertisers ramped up their spending for the holiday season.
"We feel terrific about (the new formula) and know the importance of it," Semel said. "There is nothing wrong or nothing we are upset about."
Yahoo still boasts the Internet's largest audience with 402 million unique users. But it has been losing favor among investors as Google has widened its lead in the lucrative search market.
Through June, Google held a 44.7 percent share of the U.S. search engine market, up from 36.9 percent at the same time last year, according to comScore Media Metrix. Yahoo ranked second with a 28.5 percent share, down from 30.4 percent a year ago, comScore said.
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