The Bull says: Buy

Yahoo this month might have turned in a lackluster earnings report, but that didn't stop Merrill Lynch from issuing a bullish report on the company.

This morning, the brokerage house upgraded Yahoo to "buy," noting that the downturn in the company's stock price--35% year-to-date--seems to have created new opportunities for investors. "Yahoo is at an attractive entry point entering a seasonally strong holiday period and in-front of a two-year search monetization upgrade cycle, in our view," wrote analyst Justin Post. While Merrill Lynch noted that Yahoo lagged behind Google in paid search marketing--and predicted that Yahoo likely will need at least one year before it's able to compete with Google on that front--the report also pointed out that Yahoo's share of search queries has remained relatively stable. In addition, the company's new Panama platform is expected to help it compete for search dollars.

What's more, Yahoo's large audience should be a plus when it comes to drawing marketing budgets, according to Merrill Lynch. "Yahoo has a best-of-breed Web user base," states the report. "The company is well positioned for all online advertising growth opportunities, including branded, search, mobile and video."

At the same time, there hasn't been a lot of good news from Sunnyvale lately. Aside from the company's report of softness in auto and financial ads, the other notable recent news item stemmed from what Yahoo failed to do: close a deal to buy Facebook, despite reportedly offering more than $1 billion for the company.

While Merrill Lynch is upbeat about Yahoo's potential, whether the company actually can entice marketers to increase spending at the site remains to be seen.