The internet giant reported a profit for the fourth quarter of $683m (£386m), up from $373m in the same period last year. But earnings of 16 cents a share fell short of analyst forecasts of 17 cents, leading to its share price tumbling by 12.8% in after-hours trading to $34.95.
Yahoo! blamed its failure to meet the forecasts partly on its acquisition of a 40% share in Alibaba in China, costing $310m. However, it argued that with a rise in revenues for 2005 of 47% to $5.3bn, it had had a good year.
Terry Semel, chairman and chief executive officer of Yahoo!, said: "Yahoo! has a strong track record of focusing and delivering on some of the biggest opportunities on the internet."
In an interview, Semel admitted that rival Google had been more successful in delivering relevent contextual advertising, meaning more click throughs and more revenues for Google.
He said: "It's like we built our house first and someone came along and built an even better house."
It was not a good day for technology stocks. As the shockwaves from the Livedoor scandal in Tokyo were felt on markets around the world, Intel also revealed that it had failed to meet forecasts and its share price tumbled 4%. Even golden child Google saw its stock decline by 4%.
Shares in Livedoor have been suspended on the Tokyo Stock Exchange after it was revealed that the company was being investigated on suspicion of having given investors false information.
A stampede to sell other shares led to the market being closed early today because of fears its computer system could not cope with the volume of sales.
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