Standard & Poor's equity analyst, Scott Kessler, has a buy rating on eBay, Inc. (NASDAQ: EBAY), a hold on Google, Inc. (NASDAQ: GOOG), and a sell on Yahoo Inc. (NASDAQ: YHOO).

Kessler delivered these conclusions at a lunch at an outdoor restaurant on a cobblestone alley near Wall Street on Wednesday afternoon. The food was good, the weather was a bit chilly, and we split the check.

Here's Kessler's reasoning on the three stocks:

• EBAY price target $40. Kessler downgraded eBay from a strong buy to a buy based on valuation after the stock had gone up to $34. He thought the quarterly results were affected by one time items such as favorable foreign exchange, lower tax rate, and lower share count. Cash flow did improve and eBay used it to buy back shares. He thinks eBay's core marketplace business has questions about future growth in the U.S. and Germany. He thinks PayPal is very strong and that eBay stock is not that expensive in comparison to its peers.
• GOOG price target $525. Kessler felt that GOOG's 63% revenue growth was consistent with expectations and was impressed that it was able to lower its corporate tax rate and achieve operating leverage -- keeping R&D and General & Administrative costs in line relative to revenues. Kessler noted that by locating operations in countries where corporate tax rates are lower, GOOG not only gets the benefit of a global workforce and access to global markets, but it also lowers its taxes. As long as it keeps gaining search query market share, GOOG should do fine. But Kessler is concerned that GOOG needs to come up with new businesses to make up for an anticipated search query growth slowdown. With its story widely known in the market, Kessler believes that GOOG will not move much until these replacement lines show up in its results.
• YHOO price target $28. Kessler believes that some analysts were overly optimistic about the impact that Yahoo's Panama would have on its first quarter results. This led investors to bid up the stock too high and to be disappointed with its first quarter report. Kessler believes that Panama will not make a significant impact on Yahoo's stock price until its Q4 results are reported. Meanwhile, he faults Yahoo management for letting the euphoria to get out of control regarding the financial impact of Panama. He cited Microsoft Corp.'s (NASDAQ: MSFT) decision to tamp down expectations for Vista last year as an example of what Yahoo should have done. Until Yahoo hires a CFO and a head of its Audience business and fully rolls out Panama, Kessler thinks that CEO Terry Semel is more likely to stay in his job.

Kessler's reasoning seems sounds to me. What do you think?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in eBay, Google, Microsoft or Yahoo.

This January, Barron's round table member Fred Hickey, author of the High Tech Strategist newsletter, recommended shorting shares of Apple Inc. (NASDAQ: AAPL). AAPL was trading at $85.94 on January 28th when Hickey's call became public. If you had followed Hickey's advice back then and this morning decided to cover the short position, you would need to pay $102.20 for your shares -- taking a 19% loss.

I wrote a post on Hickey's suggestion and thought it was a bad idea. His argument against Apple consisted of four points:

• Apple was overvalued. At 20% of the size of Hewlett-Packard (NYSE: HPQ), Hickey believed that their market capitalizations were too close ($75 billion for Apple vs. $100 billion for HPQ).
• iPod's growth rate was "falling apart;"
• Computer sales were down; and
• The ongoing options investigation meant CEO Steve Jobs was still at risk.

I thought Hickey was wrong to short Apple since there was little chance it would file for bankruptcy and a great chance for positive earnings surprise. So after last night's report I asked S&P analyst Scott Kessler for his views on Apple -- he thinks it can go to $125 in the next 12 months.

The McGraw-Hill Companies Inc.'s (NYSE: MHP) S&P downgraded Yahoo, Inc. (NASDAQ: YHOO) to sell. I spoke with Scott Kessler this morning who told me that he estimated that it's worth $28 a share and since it's currently trading above it's value, at $29, it makes sense to sell it.

Kessler made an observation which I found intriguing -- that there is often a disconnect between analysts' recommendations on a stock and their target prices. More specifically, he often finds that analysts keep a buy recommendation on a stock even though it is trading above that analyst's target price. In my view, when an analyst is employed by an investment bank, there is an economic incentive to keep a buy rating on a stock -- particularly when the bank is earning revenues from other business relationships it has with that company.

S&P does not do investment banking and it judges itself on whether its stock recommendations make money for investors. Thus Kessler felt it was important to change his recommendation once Yahoo exceeded his target price of $28. Kessler developed this estimate by developing a discounted cash flow (DCF) analysis of Yahoo's core business and adding to that the value of Yahoo's minority stakes in various publicly-traded companies, such as Alibaba, a Chinese Internet company.

Kessler had a mixed interpretation of Yahoo's conference call. He was pleased that Yahoo reported 30% growth in revenues from its top 200 advertising customers. But he also believed that there was significant negative sentiment about Yahoo based on several 2006 operating disappointments -- such as the delay in introducing Panama. In Kessler's view, The positive reaction to its latest announcement has balanced the negative sentiment and may also be overestimating the income statement benefit from Panama.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, a Professor of Management at Babson College, and editor of The Cohan Letter. He has no financial interest in the securities of Alibaba, McGraw-Hill or Yahoo.

On Monday I spoke with Scott Kessler, S&P's Senior Director of Information Technology Research. He has a strong buy recommendation on eBay, Inc. (NASDAQ:EBAY) but is less excited about Microsoft Corporation (NASDAQ:MSFT), Google Inc. (NASDAQ:GOOG), and Yahoo Inc. (NASDAQ:YHOO).

Since I spoke with him in late July, he has had some good calls. He became bullish on Google in early August after which the stock rose from $380 to $480. As Google approached his $500 target, Kessler changed his call to a hold. He also was bullish on Microsoft which rose from $22 to $28 before changing to a hold rating as he felt that with a target price of $31 the potential upside in the stock was limited. And he remains skeptical of Yahoo, due to his concern about its management and business strategy.

S&P expects the S&P 500 to reach $1,510 by the end of 2007, a 7% increase over its current level. Kessler feels that while economic growth will slow in 2007, the decline will not be significant. However, he expects faster growth in Europe and Asia than in the U.S.

The slowing growth could harm eBay but Kessler feels that PayPal -- which represents 20% to 25% of eBay's revenues -- represents an under appreciated growth opportunity. In Kessler's view, PayPal could grow to be a third of eBay's revenue and it will encourage more people around the world to do more business with eBay. He believes that eBay will have a tough time competing in the important China market -- where the leading competitor Taobao is giving away the service. However, he expects eBay to earn $1 a share in 2007 and he views the stock as inexpensive at its current $32.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in eBay, Google, Microsoft, or Yahoo.