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Sector Wrap: Goldman downgrades Internet stocks

NEW YORK (AP) -- Shares of IAC/InterActiveCorp and Demand Media Inc. took a hit Tuesday after Goldman Sachs downgraded both Internet companies to a "Sell" rating.

Goldman Sachs analyst Heath P. Terry said the companies' search businesses are facing growing risks because their reliance on paid traffic has increased. His previous rating on both companies was "Neutral," but he noted that competition is growing, as is the risk of further restrictions around their business models by Google Inc.

"In (the third quarter), AOL began a search marketing campaign that directly competes, though on a much smaller scale, with IAC's program of buying search ads that direct users to similar search result pages on Ask.com," Terry said. Demand Media, he added, runs a similar program through its eHow brand.

Terry said he'd have a more positive outlook on Demand Media if the company drew traffic on its own, rather than relying on — and paying — Google to do so.

Shares of Demand Media fell 60 cents, or 6.5 percent, to $8.63 on Tuesday. The stock has traded in the 52-week range of $5.85 and $12.50.

Shares of IAC fell $3.67, or 7.8 percent, to $43.50. It has traded in the 52-week range of $39.24 and $55.57.