Analyst's advice: Break up Yahoo

Yahoo should be broken up or sold to another company, a Sanford C. Bernstein & Co. analyst said. The shares rose as much as 2.7 percent Friday.

The combined value of Yahoo's display advertising, Internet search engine and subscriptions business amounts to $39 a share, analyst Jeffrey Lindsay said in a report Friday.

Chief Executive Officer Jerry Yang, appointed to oversee Yahoo in June, is conducting a 100-day examination of the company's business, shuffling sales executives and agreeing to buy online ad company BlueLithium. Those changes may not be bold enough, Lindsay said.

"To stop the inevitable slide into irrelevance, the management team must consider more radical actions and strategies," Lindsay wrote. "Incremental changes to rebuild revenues simply won't cut it this time."

Yahoo rose 73 cents to $27.88 Friday. The stock has risen 9.2 percent this year.

Competitor Google has risen 29 percent this year, as has eBay, the world's largest Internet auctioneer.

The shares may be valued at $45 if Yahoo outsourced its paid-search service to Google, cut a quarter of its staff and revamped its advertising business, Lindsay said in a separate note on Sept. 14.

Yahoo also could be broken into ad and subscription businesses to reach his $39-a-share estimate. Advertising could be divided into display ads, which include banners and video spots, and ads that show up next to search results, Lindsay said.

The company said in July that ad revenue in the second quarter rose 7 percent to $1.49 billion. Subscription service fees, coming from fantasy-sports games and online-dating programs, rose 12 percent to $212 million.

Given a "stay-the-course strategy, we believe that Yahoo's value is locked into a much lower range," Lindsay said. He said the shares will drop to $25 under the current business model and rates them "market perform."

Investors will give Yang and the management team a "honeymoon period" of two to three quarters and then begin demanding improvements, Lindsay said. Before then, he said he expects the company to reject radical changes to the business.

Yahoo is scheduled to report earnings on Oct. 16. Of the 39 analysts that cover the company, 18 recommend buying the stock, 19 say hold, and two advise selling, according to data compiled by Bloomberg.

Bloomberg reporters Alexis Xydias in London and Ari Levy in San Francisco contributed to this report.