Two Companies Yahoo! Inc. (YHOO) Should Buy Instead of Tumblr

Top user review site

While not nearly as cheap, user review site Yelp Inc (NYSE:YELP) would provide a compelling opportunity to lead that fast growing sector. Also, the potential exists for the Yelp expertise to possibly help improve existing franchises such as Yahoo! Finance.

With a current market cap of nearly $2 billion, Yahoo would have to pay significantly more to obtain Yelp. With a fast growing revenue base expected to reach $310 million next year, again Yahoo! Inc. (NASDAQ:YHOO) doesn’t have to create a monetization plan. Other user reviews sites such as Tripadvisor Inc (NASDAQ:TRIP) already command much higher valuations making the purchase appealing at current levels. Again, earnings are close to breakeven so Yahoo! Inc. (NASDAQ:YHOO) won’t be burning through cash flow each quarter.

The company recently surpassed 100 million visitors providing access to a large user base.

Bottom line

It appears a dichotomy exists in the market where small fast growing companies command huge premiums to the revenue base and monetization plans. Questions exist on whether Tumblr can even monetize that user base. On the other hand, the public firms that already have monetization plans in place appear less attractive to buyout firms.

With the Tumblr deal, Yahoo! Inc. (NASDAQ:YHOO) appears set to swing for the fences instead of picking off strong already established businesses. Yahoo should buy Millennial Media while the stock is cheap and Yelp before it races even higher.

Mark Holder and Stone Fox Capital Advisors, LLC own shares of Millennial Media. The Motley Fool has no position in any of the stocks mentioned.

The article Two Companies Yahoo Should Buy Instead of Tumblr originally appeared on Fool.com.

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