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Google Catches Up To Yahoo

When Google went public in August, the negative publicity surrounding the company's IPO caused investors to substantially undervalue the company's shares compared to Yahoo , its closest rival.

Now the valuation gap may have closed, according to analyst Mark Mahaney of American Technology Research. Shares of Yahoo have appreciated by 20% since Google's Aug. 19 debut, while Google has gained a stunning 59% from its $85 IPO price.

Mahaney took the unusual step Monday of recommending a paired trade between the two — buying Yahoo, while betting that shares of Google will fall by shorting that stock. The recommendation comes on the eve of Yahoo's earnings report; Google reports Oct. 21.

Mahaney wrote that he expects strong earnings from leading Internet names, especially eBay , Yahoo and Google, but that they might not be strong enough to meet investors' high expectations.

"GOOG's recent share price rally now leaves it trading at no material discount to YHOO ... and we believe a discount is warranted," Mahaney wrote.

"YHOO has more upside potential and less downside risk from current price levels," he added.

Google has become a momentum stock, he said, which could leave it vulnerable to a correction. The risk to his call, he acknowledged, is that Google could post a blow-out quarter, stock split, or some other surprise that would make it continue to be more attractive than Yahoo.

The Internet search space is competitive and becoming more so, Mahaney noted. Yahoo has the advantage of offering exposure to branded advertising and fee-based services, he said, and will be providing investors forward guidance, which Google has said it won't do.

Stocks rose Monday ahead of earnings reports from Intel and Yahoo due out after the close on Tuesday, while chip stocks lagged on downgrades to Texas Instruments and Micron .

The Nasdaq climbed 8 to 1928, the S&P 500 added 2 to 1124, and the Dow rose 26 to 10,081. Volume declined to 944 million shares on the NYSE, and 1.18 billion on the Nasdaq. Advancers led 17-15 on the NYSE, and 18-12 on the Nasdaq. Upside volume was 49% on the NYSE, and 62% on the Nasdaq. New highs-new lows were 84-27 on the NYSE, and 73-53 on the Nasdaq.

Global Crossing plunged 20% on plans for layoffs and additional financing.

Travelzoo jumped 12% ahead of its earnings report Tuesday morning.

Shares of GRIC surged 17% on an upgrade.