It was announced late Sunday that Yahoo! Inc. (NASDAQ:YHOO) would be acquiring Tumblr, a large online blogging community. Want to know the price on that acquisition? An incredible $1.1 billion in cash, straight from the Yahoo! coffers.
Initially the deal made me wonder what on earth was going on in the minds of the Yahoo! board. I eventually remembered that twice in the last decade I have asked a very similar question. Once was when Google Inc (NASDAQ:GOOG) put up a huge $1.65 billion to acquire the then-under-two-years-old video website YouTube. A second time was just last year when Facebook Inc (NASDAQ:FB) put up $1 billion for Instagram.
YouTube and Instagram
I’m sure that everyone out there shares the thought that Google Inc (NASDAQ:GOOG)’s acquisition of YouTube was an incredible move. Google acquired the company quite young for a very questionable sum.
Since the acquisition, Google has gone on to work its way up to 1 billion unique visits to the site per month, and those visitors watch over four billion hours of videos! An astonishing 72 hours of video is uploaded to the service every minute. Yes, it takes a lot of resources to keep it running, but YouTube is making its fair share of cash too.
YouTube equated to around 8% of Google Inc (NASDAQ:GOOG)’s $37 billion in revenues. As time goes on and the company manages to monetize the videos in an even more focused matter we could see that number increase.
Now on to Instagram, which was acquired by Facebook Inc (NASDAQ:FB) right around a year ago. Since that time the service has grown from big to even bigger. Over 100 million people now log in to the photo sharing service every month. Those users upload 40 million photos per day and post an incredible 1000 comments every second.
Despite these incredible numbers, Instagram isn’t making back its money just yet. I’m sure that Facebook is hard at work to try and figure out a way they could bring the company to profitability, but as of now its loss stands at $1 billion.
I would argue that from a user standpoint, Instagram has been a rousing success. Now Facebook Inc (NASDAQ:FB) simply has to take those users and monetize the service.
Tumblr
This web service generated just $13 million in revenues last year. I don’t think you’ll find many industries where an 84-times sales ratio is rational, but in tech it is.
Obtrusive ads are, at least in my opinion, out of the question for a service like Tumblr. Yahoo! Inc. (NASDAQ:YHOO)’s best bet would be to try and instill some form of premium features. Instagram could probably try that too.
Making money – Google
You can’t go wrong with Google Inc (NASDAQ:GOOG). The company has a lockdown on search, and YouTube will continue to grow into the future. Mobile is key for Google, both in terms of search expansion and delivering quality content from YouTube and its other services.
CAPS has Google Inc (NASDAQ:GOOG) rated at a solid 4 stars, and why not? The company saw a year-over-year sales growth of 32% at the close of the last quarter, net income has been growing at 20.74% per year over the last five years, and the company’s net profit margin is a solid 21%.
Google, even at its current high levels, remains a buy in my book.
Making money – Facebook
Facebook Inc (NASDAQ:FB) definitely seems to me as a big “meh.” The company has an incredibly high price-to-earnings ratio, and would have to do some seriously hard work monetizing its services to bring that down. Instagram, if they can successfully monetize on it, will definitely help out in the long run.
For now, I’m going to keep my distance from the Facebook Inc (NASDAQ:FB) stock. The company lost some 31% of its value over the year after its IPO date, and I believe that it will remain quite stagnant for a while yet.
Facebook’s net profit margin came out to be a paltry 1.22% in the last quarter; the company also has a shocking return on equity of just 1.36%. Don’t put money into this company; it can be better spent elsewhere.
Making money – Yahoo!
Now to the newsmaker, Yahoo! Inc. (NASDAQ:YHOO). Yahoo! has been doing quite well since its new CEO, Marissa Mayer, took over. In fact, the company may even be investment worthy.
Yahoo! has averaged a 16.3% net profit margin over the past five years. That beats out both the S&P 500 and Facebook Inc (NASDAQ:FB).
When it comes to the future, I don’t really see the company’s traffic increasing too much. For me this means that Yahoo! Inc. (NASDAQ:YHOO) will have to focus on getting more money out of its current users. Better placements of display advertising will likely turn out to be a key move for Yahoo!. If the company can also figure out how to monetize Tumblr effectively I think we’d have an investable company on our hands.
For now, it’s a hold in my book. A significant drop would make it a buy, but I’d prefer to play the waiting game on this one.
Ash Anderson has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google
The article Yahoo! Buys Tumblr – Remind You of Anything? originally appeared on Fool.com.
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