It took 40 years for Moses to lead the Israelites to the Promised Land. Let's hope that Yahoo! (YHOO:Nasdaq - news), the leader among Internet advertising stocks, doesn't take quite so long to guide other companies out of the desert.

Selloff Yahoo!'s unhappy autumn.

Its first opportunity to blaze a trail out of the Internet ad drought comes Tuesday evening, when Yahoo!, traditionally the first Internet stock to report each quarter, is slated to disclose its revenue and earnings -- yes, earnings! -- for the quarter ended Sept. 30.

If the Internet bellwether decisively beats expectations, or if it waxes optimistic about the rest of the year, it could not only prop up its gravity-battered stock price, but also lend some much-needed good cheer to the community of advertising-related Net stocks, which have floundered since this spring's dot-com meltdown.

What, Me Worry?

Not that Yahoo! itself doesn't have enough to worry about in its own tent. The company's problems in the market boil down to this: If you bought Yahoo! since, say, Sept. 17, 1999 -- well, you have our deepest sympathies.

The Problem With Gravity Yahoo! stock returning to Earth.

Source: BigCharts

The company -- whose growth, profitability, management and popularity among users make it the Internet company that most others wish they could be when they grow up -- is busy seeing its stock carve out new 52-week lows, erasing all gains since last September. In January, it hit a split-adjusted high just over $250; six weeks ago, it was around $130. On Friday, the stock, falling even further, dropped $3.44 to close at $81.25.

Is the stock's recent drop a product of perception, or of reality?

A little of both, but perception mostly, says Ethan McAfee, Internet analyst at T. Rowe Price, a Yahoo! shareholder. "Over the last month, we've seen a lot of the second-tier Internet advertising companies miss earnings substantially," he says, rattling off names such as ad infrastructure firm Mediaplex (MPLX:Nasdaq - news) and consumer-focused companies like NBC Internet (NBCI:Nasdaq - news), none of which his house owns.

That misfortune has rubbed off Yahoo!, which despite its fall from its superheated high earlier this year, is still trading at a lofty multiple -- about 140 times estimated 2001 earnings.

The Perception Part

This is the perception part, McAfee explains. "No one sits back and says, 'I'm willing to pay 150 times earnings, but not 155,'" he says. "So they trade on perception and news flow as much as underlying business fundamentals. So if the perception turns, the stock can be off 30%."

And yet, Yahoo! is in a good position relative to the second-tier stocks, which he effectively defines as everyone else but America Online (AOL:NYSE - news) and DoubleClick (DCLK:Nasdaq - news), both of which T. Rowe Price owns.

The top-tier firms, says McAfee, are the ones where the major advertisers start; the rest are the ones that get the incremental spending that has been drying up over the past few months -- the ones that usually benefit, as McAfee puts it, from advertisers' saying, "We'll give so-and-so $1 million this quarter and see how it goes."

What They Want

That being said, expectations aren't running high for Yahoo!. "It's not going to be one of those quarters where they blow by earnings by 30%, the way they did in the past," McAfee says.

The consensus expectation is that Yahoo!'s revenue for the third quarter will be $280 million, 4% above the second-quarter figure of $270.1 million, and 81% higher than third quarter 1999. The earnings-per-share consensus, according to First Call's survey of analysts, is 12 cents, even with the second quarter and up 72% from 1999. (The earnings estimates exclude a one-time charge related to Yahoo!'s recently closed acquisition of mailing-list site eGroups.)

But the market is likely looking for something higher. Merrill Lynch analyst Henry Blodget, for example, writes in his earnings preview that revenue of $290 million is possible, and McAfee pegs the whispered $290 million as the key over-under number of Tuesday evening. "The real question is what the revenue number is, because that will tell you how bad the market was in this quarter for the top-tier companies," he says. "If they beat that number, it'll go up. If they don't beat that number, it'll go down."

Of course, investors will be listening in on the earnings release conference call for Yahoo!'s outlook on the fourth quarter and beyond. "Since Yahoo! is the first one to report, it will tell a lot about what's going on," McAfee says.

It Just Looks Expensive

For investors trying to figure out exactly how richly valued Yahoo! might be, Blodget spends a lot of time in his earnings preview arguing that it's not as expensive as it seems. Blodget argues that, as is the case with other successful tech companies in good markets -- notably Microsoft (MSFT:Nasdaq - news) and Cisco (CSCO:Nasdaq - news) -- investors should think about valuing Yahoo! not just on the basis of earnings per share, but on the total cash it generates, including money derived from its employee stock option program, normally considered a result of financing, not operations.

McAfee suggests Blodget is fighting an uphill battle with that idea. "To have people change the valuation metrics that they look at is a very difficult thing," he says. "It's more a neat little exercise than something I say, 'Oh, wow, that really changes my perceptions!'"