After snatching up Tumblr and now on the prowl for Hulu, Yahoo! Inc. (NASDAQ:YHOO) should instead buy some established growth companies. At the end of last year, Yahoo suddenly became cash rich after cashing out of a large investment in Alibaba. The company is now using the cash to buy well-known growing brands, but will it work?
Yahoo is following in the footsteps of the Facebook Inc (NASDAQ:FB) purchase of Instagram for $1.0 billion in the hopes of monetizing a vast and growing user base. The company paid roughly $1.1 billion for hot blogging network Tumblr that only has a revenue base of around $13 million. The question remains whether Yahoo! Inc. (NASDAQ:YHOO) would be better off making a large purchase of an under monetized asset or go for some of the public firms already on successful monetization paths?
Is Hulu the best option?
According to AllThingsD, Yahoo is bidding in the range of $600 million to $800 million for Hulu. At the top end of the range, Yahoo! Inc. (NASDAQ:YHOO) will have spent nearly $2 billion on the two purchases. This move comes after failing to obtain a stake in French video site Dailymotion and comes amid numerous other bidders for the site making a deal hardly assured.
What does Yahoo! Inc. (NASDAQ:YHOO) get in the deal? According to this article, Hulu has a revenue base of $695 million for its video streaming service. The site has 10 million people visiting its website with over 3 million paying subscribers. While the subscriber base isn’t impressive, the revenue total is much more attractive than Tumblr.
Leading independent mobile ad network
A more intriguing purchase would be the leading independent mobile ad network, Millennial Media, Inc. (NYSE:MM) that currently has a market cap of only $655 million. The company works with most of the Ad Age leading advertisers and would provide Yahoo with an immediate large presence in the mobile ad space.
Analysts forecast the company to generate $275 million in revenue this year growing at a 55% clip. Millennial Media is also expected to be slightly profitable this year providing Yahoo! Inc. (NASDAQ:YHOO) a base to build upon with its massive sales force as opposed to needing to derive a monetization plan.
With the stock down massively since the IPO back a year ago, investors are unlikely to jump at any mild premium so price could become a major sticking point. The company though provides access to data from 420 million monthly unique mobile visitors globally.
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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