UBS Turns Sour on Advertising, Even Online

It has been a summer of discontent for publicly traded Internet companies, whose shares have nosedived in tandem with the broader market. And the group — led by Google (s GOOG) and Yahoo (s YHOO), both of which saw double-digit declines in the last month — is not going to be dancing in the streets any time soon.

Or at least that is what Ben Schachter, Internet analyst with UBS, thinks. In an astoundingly sobering note to his clients this morning, he cut his estimates on his entire portfolio of coverage:

we are also lowering our estimates and price targets across the board to reflect a deteriorating macro-economic environment that we expect will inevitably impact the online advertising market and consumer spending, likely continued unfavorable foreign currency fluctuations (at least in the near-term), as well as other company-specific factors.

In a rather brutal assessment, he wrote, “[W]e see no business model based on advertising or consumer spending that will be immune to a downturn. Specifically for the advertising names, as corporate profit forecasts come down, we expect planned advertising spending will be delayed and/or cut.”

UBS also had the following thoughts on the third quarter of 2008:

  • September was difficult.
  • Google held up better than others, though Schachter still thinks that results might be below expectations.
  • Stronger dollar is going to cause issues for guys like Google.
  • More cautious on 3Q results from Yahoo and ValueClick (s VCLK)

Looking beyond to the fourth quarter of 2008 and 2009, UBS noted more optimistically, “[W]e think that the continuing shift to online will be somewhat accelerated by the macro weakness.”

Now here we are talking long term, and even as I trust Ben’s analysis, I am one of those folks who is assuming the absolute worse. Why? Because these are irrational times. Guys, General Motors has a market valuation that is lower than its value in 1930. Yahoo is a company that is likely to hit a massive air pocket, because it is highly exposed to financial- and automobile-related advertising.

Regardless, Schachter sees no near-term bottom in sight for the Internet stocks and is advising that people don’t try and catch a falling knife. In particular he was sour on ValueClick, an online advertising network. I think this is a bad sign for all advertising networks out there, especially the startups that are trying to get traction in this market. He did point out that Google will get beefier and bigger in these lean times.