Google (GOOG) just picked up another promising startup in its effort to gain some ground in the online visual advertising market. Teracent, which was formed three years ago, is becoming part of the search engine giant.

Yahoo! (YHOO) currently leads the market in display advertising sales, and Google has been trying push into the space. Last year, this led to its acquisition of online ad service DoubleClick, but that was a first step rather than a total solution to Google's display ad ambitions.

Yahoo! (NASDAQ: YHOO) yesterday posted its lowest price in nearly five years. The stock moved to $17.75, down from a 52-week high of $34.08.

The Wall Street Journal pushed the idea that this was an options play. "Trading in Yahoo options leapt to four times the normal level as investors picked up 168,000 calls that allow them to buy the company's stock." In other words, some traders are willing to gamble that the shares will go up.

But, they won't go up. There is growing evidence that marketers prefer search internet ads to display advertising. Yahoo! sells a great deal of display inventory and is a distant second to Google (NASDAQ: GOOG) in search. Some of that may change as Yahoo! begins to use the Google system to create its search results.That may not offset the fact that Yahoo! probably has as much display advertising availability as any company in the world.

Because Yahoo! has shown it is unwilling to make major cost cuts, a flattening of its revenue growth would be a disaster for its investors. The firm's year-over-year sales improvement is already barely above 10%. What had been a growth stock three or four years ago has now become a buyout gamble. Investors still hang on to some hope that Microsoft (NASDAQ: MSFT) or a large media company will make an offer for the portal company.

That means that Yahoo! still carries a "takeover" premium, which begs the question of where the shares might trade at the end of the year, if there are no offers. Investors are gambling that there is a 30% chance that Yahoo! will be bought, if it is not, the stock heads toward $13.

Douglas A. McIntyre is an editor at 247wallst.com.

The numbers are pretty impressive. In 2007, internet advertising grew 25% to $21 billion. But Microsoft (NASDAQ: MSFT) may want to have another look at what it is offering for Yahoo! (NASDAQ:YHOO).

According to The Wall Street Journal (subscription required), internet ad revenue grew 35% in 2006. Between a possible recession and the natural slowing of increases as the dollar base gets larger, overall dollars in this market may only grow 15% in 2008, especially if the recession is deep. That would devalue almost every media company that gets its revenue from internet ads.

Companies such as Google (NASDAQ: GOOG) have driven their stock prices by being able to deliver targeted ads, which are an efficient way to reach clients. Much of the buyout activity for ad-serving firms is to extend the scope of this business.

But, just as the M&A work is done, internet advertising may be hitting an awful headwind.

Douglas A. McIntyre is an editor at 247wallst.com.

Yahoo! Inc. (NASDAQ: YHOO) Chief Executive Jerry Yang is going to have to convince investors that the company he helped found in 1995 still matters when it reports fourth quarter results later today. It's not going to be easy.

The most visited Web site is expected to report its eighth straight quarter of declining profit. according to Bloomberg News. Analysts surveyed by Thomson Financial are expecting an average profit of 11 cents on revenue of $1.41 billion. Expectations, to put it kindly, are real low.

The view of Sanford Bernstein analyst Jeffrey Lindsay quoted by Bloomberg that Yahoo ``just isn't generating anything like the resources they need to really stay in the game" is typical. Yahoo shares have plunged more than 27% over the past year.

Unfortunately, Google Inc. (NASDAQ: GOOG) isn't the only company taking a bite out of Yahoo which trails the search engine giant in every conceivable metric. Social networking sites such as Facebook continue to siphon away young users coveted by advertisers as are smaller niche sites, forcing Yahoo to offer rate discounts to advertisers.

According to a report at TechCrunch, Google Inc. (NASDAQ: GOOG) is working on programs that will drive adoption of video advertising online. CPMs, the rate that advertisers charge customers, are estimated to be over $40 for online video. This is much higher than the rate for simple banners.

Google obviously has an edge, if it can come up with a program that both advertisers and content companies will accept. Due to its ownership of YouTube and Google Video, the company has the largest audience for video content. What it still lacks is a broadly accepted program to move TV advertising to the web.

One of the issues facing Google and competitors is whether people are willing to watch ads that are much longer than 10 or 15 seconds. Longer ads clearly offer a better opportunity to explain product features, but if web visitors will not take the time, it does not matter.

The other substantial problem is where the ads go. Do they belong in the programming or in some other spot on the web page.

With display advertising growth rates slowing and text search ads reaching a level where their year-over-year numbers are likely to be less robust, the battle for internet revenue may well turn to video.

Douglas A. McIntyre is a partner at 24/7 Wall St.

The latest weekly report from HitWise shows Google Inc. (NASDAQ:GOOG) with over 60% of the US search market. Thirty-eight of the analysts who cover Google have a buy rating or better on the stock. But, according to Bear Stearns, Google's hyper-growth is slowing. Search queries were up 29% in March, but a year ago, that number was 50%.

In the face of all this data, The Wall Street Journal wonders whether investors are putting their expectations for Google earnings, which are going to be released today, too high.

Probably not.

Google still has to earn its tremendous valuation. The company's shares trade at almost 14 times trailing revenue. For Yahoo! Inc.(NASDAQ:YHOO), that number is less than 6x. At eBay Inc. (NASDAQ:EBAY), the figure is about 8x.

None of this is to say that Yahoo! and eBay are not fairly valued. But Google carries a premium of almost 100% when market cap to sales is the measurement. It has to keep growing at the anticipated rate of about 70% year-over-year to keep that premium.

So, when Google reports earnings, expectations will be too high. But, they should be. Google has managed to beat "too high" before.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Yahoo! Inc. (NASDAQ: YHOO) today posted disappointing first quarter earnings. Chief Executive Terry Semel is in deep trouble.

The no. 2 search engine had net income of $142 million, or 10 cents per share, compared with $160 million, or 11 cents. a year earlier. Revenue rose 7 percent to $1.67 billion. Excluding payments Yahoo makes to partners, revenue was $1.8 billion. Analysts had expected profit of 11 cents and sales excluding so-called traffic acquisition costs of $1.21 billion, according to Thomson Financial.

Of course, shares fell in after-hours trading.

What can be said about the Sunnyvale, Calif.-based company that hasn't been said a thousand times before? The company is losing ground to Google Inc. (NASDAQ:GOOG) and needs to regain the confidence of Wall Street. I just don't see how Semel is going to survive.

The love-hate relationship between Wall Street and Yahoo had recently swung to the positive side. Yahoo!'s fans, including me, argued that once Project Panama got off the ground, the turnaround would begin.

RBC Capital Markets analyst Jordan Rohan, who rates Yahoo as outperform, summed up the situation well to Bloomberg News.

``Investors have confused the initial success that Yahoo has had with Panama with the overall company performance,'' he said. ``The company clearly is still in transition.''

With Google Inc. (NASDAQ: GOOG) paying $3.1 billion for DoubleClick, Wall Street investors are going to take a second look at aQuantive Inc. (NASDAQ: AQNT) and ValueClick Inc (NASDAQ: VCLK) as possibly the next acquisitions in the Internet marketing and advertising space.

DoubleClick was taken private just a couple of years ago at $1.1 billion. With the $3.1 billion price tag Google is paying, it's no wonder that ValueClick and aQuantive were both up a good 5% in after-market trading on Friday. The valuation explosion is almost geometrical.

Microsoft Corp.(NASDAQ: MSFT) is now behind the eight ball. The whole internet advertising, marketing and lead-generation space has become an art and a science unto itself. DoubleClick, ValueClick and aQuantive all have their own areas of expertise and proprietary technology. These three companies are the recognized leaders in the sector. The sector was validated these past three years in a serious way as major Fortune 500 companies have decided to dedicate more of their advertising and marketing resources online.