James Altucher: Yahoo could be a winner at internet tag

You read it here first. The next killer application in the field of internet search engines is tagged searching across multiple social networking sites.

If you haven’t already done so, I recommend checking out the sites Del.icio.us, Flickr.com, or YouTube.com. Del.icio.us allows users to upload all their internet bookmarks and label each one with a descriptive word or phrase (the “tag”).

You can then search by keyword, “chess”, for instance, and see all the sites that people have uploaded to Del.icio.us (implying it was an important enough site about chess to be a bookmark for someone) and then labelled with the word “chess”.

On Flickr.com there is the same mechanism, except it is possible to upload photos instead of bookmarks. This creates a much more impressive search engine for photo content than the Google images search.

A computer cannot and will never be as good as a human in terms of automatically cataloguing visual content. Someone once told me: “Computers will not be artificially intelligent until they can taste an apple and tell me whether it was good or not.” There are some things computers just cannot do.

YouTube.com is the same idea only with videos. It gets more than 50,000 videos uploaded every day. I have to admit, I watch YouTube.com now more than I watch television.

I go on to YouTube and I will search for “Matisyahu” or “comedy” or even “chess” and I can watch the videos that pop up for the next several hours. If you are looking for new ways to waste time, try searching on YouTube.com.

Tagged searches produce results that are an order of magnitude more relevant than Google searches. And user-generated content, such as the above sites and others (check out Digg for user-labelled news) is all the rage now, and with good reason.

All of this is to say: Yahoo is the stock to buy right now in the tagged search arena. Don’t get me wrong, I love Google, the company. But the stock is a gamble and Yahoo is cheap, once Wall Street analysts wake up to the reality of tagged search.

Why Yahoo? Well, of the sites I mentioned above, Yahoo has quietly acquired Del.icio.us and Flickr.com. Terms were not disclosed.

How come? Because they were so cheap they aren’t material to Yahoo. Yahoo gets content and user experience.

Lloyd Braun, the head of content (and former head of entertainment at television channel ABC – think Lost and Desperate Housewives – both of which he developed) has been spearheading these efforts to get into tagged search.

And Terry Semel, former head of Warner Brothers and now chief executive of Yahoo, is no stranger to content either. Yahoo will dominate the tagged search arena and advertisers will stand up and take notice.

But this is not the only reason Yahoo! is a buy now. Here are some more:

Yahoo! is relaunching its search engine in stages during the third and fourth quarters of this year. The new engine will increase revenue per search although Yahoo has guided that this increase is a multi-year process.

Specifically, the company is adding a “quality-based ranking model” to its advertisements so that advertisers can bid for an ad not only based on how often it comes up on search results but also on its click-through results. The ad platform will also add geographic, demographic, and behavioural targeting.

This makes the Yahoo advertising platform very similar to the Google platform. When Google went public everyone considered Yahoo! to be old school and too focused on content. But Yahoo! has more users and more categories for demographic slicing, and will now offer the same resources for ad targeting that Google offers. Game over.

I mentioned that Yahoo! has been buying social search sites but they have also been generating their own user-generated content. Yahoo Answers has been a huge success. In addition to being a fun experience, Yahoo Answers is developing enormous user-driven content as more than 20m answers generated by 7.2m users have been stored there since its launch.

Yahoo! also has a strong presence in China with its $1bn investment in Alibaba. Two weeks ago they also bought a 10 per cent stake in Gmarket, South Korea’s second largest online retailer.

Finally, Yahoo! guidance calls for 24-31 per cent growth in revenue and 8-19 per cent growth in free cash flow for 2006.

No one knows what will happen with the world economy but we do know that the “emerging economy” of the internet is still growing and that when every other category has troubles, the internet might be the last man standing.

Right now, internet advertising is barely out of the experimental phase, attracting only 8 per cent of ad budgets. When advertisers really begin to focus on finer segmentation, targeting, and performance tracking, I think Yahoo! stands to benefit even more than Google.

I am a believer in the company, whose share price stands at $30, and I think we can see $40 again over the next year.