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Explain this one to me because I still don't get it: Yahoo shares are near $18 a share, or a five-year low; and Google continues to slide. Both are getting hammered for decidedly different reasons, but on a price to earnings ratio, Yahoo is still way, WAY more expensive than Google. By a lot!

Google's

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[GOOG  Loading...      ()   ]got a forward P/E of 19x while Yahoo still trades at a frothy 33x next year's earnings. Chew on that for a little bit. Why does Yahoo

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[YHOO  Loading...      ()   ]carry such a dramatically higher premium than Google? I'll come back to that in a second.

First, both companies are in the red today thanks to the JP Morgan report out this morning suggesting weakness in display advertising because of the general economic malaise gripping so many companies during this non-recession recession.

Analyst Imran Khan suggests that advertisers are getting more conservative with their spending, and he cut his forecast in display advertising from $8.6 billion to $8.2 billion. The slide, he says, will bleed into next year as well, with Khan reducing his spending forecast from $10 billion to $9.4 billion in 2009. It gets worse: search market growth will be closer to 18 percent instead of the 37 percent he originally forecast next year. Needless to say, the news is taking its toll on shares in both Yahoo and Google, extending their recent declines by a few more percentage points today.

As an aside, Khan also slightly cut his estimates, a penny here, a couple of pennies there, on Amazon, eBay, Google, Yahoo, Orbitz and Expedia.

So that's the bad news. The good news comes from the Wall Street Journal which says spending on online advertising is actually heating up, surging 20 percent during the second quarter here in the US. In fact, the Journal says snappier display ad spending is also increasing, which play into Yahoo and Microsoft's strengths as Google continues to try to digest its DoubleClick purchase.

Still, the Journal says search-ad spending will reach $10.4 billion, or twice the chunk of cash spent on display advertising as companies try to figure out how to spend the least amount of money for the most amount of exposure. Which means the pendulum might be swinging back in favor of Google which continues to own search advertising.

And that brings me back to the premise of this post: Yahoo teeters at $18 a share (remember Microsoft's offer of $34 a share? Seems like a lifetime ago); Google around $455, yet Yahoo's P/E is almost twice that of Google's. What gives? Are the opportunities ahead for Yahoo that much more extraordinary than Google's? Sure, Google is still largely a one-trick pony, while Yahoo has the potential for a number of revenue streams, offering entertainment, sports, shopping, all kinds of information as a one-stop shop. And the company has begun to execute on its (albeit long term) turnaround plan. But this is the same company that turned down that 70 percent premium from Microsoft and few analysts I've talked to see any meaningful growth at Yahoo for at least another year. Yet its shares, despite their collapse over the last few months, are still incredibly expensive.

Google's got a nascent browser that could extend its brand against Microsoft

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[MSFT  Loading...      ()   ] . And it continues to gain search share against any of its so-called rivals. Maybe Google's one-trick pony status is spooking investors. But as this company prepares to celebrate its 10th anniversary in business, it has seen extraordinary growth and almost immeasurable influence. The mobile Android operating system is getting ready for market, tweaks to software should improve margins, and there are still a number of analysts on the Street touting $600-plus targets on Google.

Seems to me that Google still enjoys the leadership position in the sector, and I can't fathom why Yahoo is the one with the nosebleed premium. Makes no sense.

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