the PPC Book|Pay Per Click Blog | Long Tail Thoughts in a Short Tail World

A friend of mine is a stock analyst out in California. When it comes to money, he’s probably the smartest person I’ve ever met. He almost never loses, at anything. I’ve actually been in Vegas with him when the pit bosses told him to take his money and go home. He was killing them.

This is why I was so suprised when he told me, while on vacation last September, that he had a big position in Yahoo. Being someone who knows Yahoo better than a lot of people who work at Yahoo (ie, my reps), I obviously saw them as breathing their last gasps of air in the PPC market. Of course there was hype about Panama, yada yada yada yhoo.

Of course, technical analysis of stocks doesn’t exactly correlate to the day to day performance of a company, so I told him what I thought about Yahoo as a business, and he remained cautiously bullish on the stock price. Since then, I casually watched as the stock dropped, which made complete sense to me, and shook my head, wondering how my friend who is so smart could make such a bad pick. Fast forward to January, and Yahoo starts to rally in anticipation of Panama. So, as of today, the stock is almost exactly where it was in September. Where does it go from here?

My friend emailed me today and asked, “Do you think Yahoo has legs. Nice little rally from the low $20s.” Granted, I know absolutely squat about investing in stocks, but that never stopped me from having an opinion. Here’s my reply:

“There’s 2 factors:

1 – Their new quality score system – a la google adwords

2 – Their share of ad spend / inventory

Assuming their inventory levels stay the same they will make more money selling the same amount they are now. This quality score factor just got implemented this week. Go back and look at Google’s profitability as soon as they implemented their quality score. They did it 2x, the most recent being Fall 06. I bet you their profitability skyrocketed. What this system does is penalize poor ads/web sites by forcing them to pay through the nose to run ads, where before they could buy clicks for .10. The number of advertisers who drop out is far outweighed by the people who stay in the game and overpay for traffic that they undermeasure.

Look for a major jump in profits starting right now.

Secondly, they have to win back the ppc advertisers who told them to *** off because their system was a pain the ***. They seem to be making progress with it, but I don’t know for sure. They seem like they are trying, but I don’t believe in their current management team. They don’t really seem to understand, or be committed to, search marketing. They have the content game down pat, better than google by far, but their technology is so poor, and they do stupid things, like shut off their free tools that everyone likes to use.

Anyway, they need to keep improving their content, because it’s what drives the inventory, but they also need to get serious about engineering. If I was them I would offer the top 3-5 engineers at google some type of package they can’t refuse. Something.

It’s there for them to take, they just need to execute better.”

So, we shall see what the future holds. Maybe my friend is right, maybe Yahoo has legs. What do you think? Buy or sell?