The glass half empty
Yahoo! Inc. (NASDAQ:YHOO) is under pressure. Some may say it´s even desperate to revitalize its image and attract more traffic in order to regain some of the traction it lost over the last years. The company has been lagging competitors for a long time, and something needs to be done in order to turn things around.
Google Inc (NASDAQ:GOOG) has become the unquestionable leader in search and the company owns assets like Gmail and YouTube, which are enormously valuable when it comes to generating traffic and selling online ads.
In addition to that, Facebook Inc (NASDAQ:FB), with its more than one billion users, has changed the competitive landscape in the industry by benefiting from the popularity of social networks and seducing advertisers with the enormous amounts of information it collects from that user base.
Big deals in the tech industry don´t have the best track record of success, especially when they are done by companies looking for ways to solve their problems as opposed to capitalizing an opportunity for growth. And Yahoo! doesn´t have an auspicious acquisition history either. Deals like Delicious and Flickr turned out disappointing users of these services after they were incorporated into Yahoo! Inc. (NASDAQ:YHOO) and modified by the company.
The price tag of $1.1 billion looks expensive considering that Tumblr produced $13 million in revenue during 2012 and is expected to generate $100 million in 2013. If that weren´t enough, there are some important issues that Yahoo! will need solve, like the fact that Tumblr has plenty of pornographic content that could be a problem when it comes to monetizing the platform via advertising.
These kinds of deals can be complex to manage, and Yahoo! Inc. (NASDAQ:YHOO) needs to be careful not to scare Tumblr users away. This is far from a sure bet by Marissa Mayer and her team, so we are miles away from being able to tell if the Tumblr deal will effectively solve Yahoo!´s problems, or even justify its price tag over time.
The glass half full
It is risky and complicated, but that doesn´t necessarily mean it´s a bad decision. To begin with, Yahoo! is gaining access to a big and growing audience; Tumblr has 55 million bloggers, and 300 million visitors per month. More importantly, the quality of those users is perhaps even more relevant than the number itself.
Tumblr may inject a lot of life and energy to the content in which Yahoo! currently relies. Tumblr caters to a younger demographic that spends massive amounts of time sharing photos, videos and animated GIFs on the site, this is something that Yahoo! doesn´t have, and a much welcome addition to the company.
Tumblr has also been stealing traffic away from Facebook Inc (NASDAQ:FB) and outgrowing Google Inc (NASDAQ:GOOG)´s blogging platform. Keep in mind that Yahoo! has been losing a lot of ground to these competitors over the last several years. Buying a ‘cool’ company that is doing better that the competition in its area is certainly a start in the right direction, and it could be a big morale booster for the company.
One big area in which Yahoo! Inc. (NASDAQ:YHOO) has been lagging the competition is mobile, where most of the industry growth is coming from. Google Inc (NASDAQ:GOOG) has Android, the dominant mobile operating system with a global market share of more than 75%, and the company also owns many of the most popular cross platform applications and services like Search, Gmail, Maps and YouTube among many others.
According to data from comScore, Yahoo! gets 16% of its traffic from mobile-only users. Meanwhile Facebook Inc (NASDAQ:FB) is much stronger in that area with 25% of its users being categorized as mobile only. Tumblr has the same percentage of mobile-only users as Facebook with 25%, so Yahoo! is gaining users in a key growth area. According to The Economist, Facebook was interested in acquiring Tumblr too, so the company didn´t just gain many valuable users, it also took them away from a critical competitor.
If Yahoo! wants to take it slow when it comes to monetizing the platform via advertising, justifying the purchase price won´t be easy in the middle term. However, the acquisition of YouTube by Google for $1.65 billion in 2006 sounded like a crazy price back them, and it turned out to be a great strategic move some years down the road.
These kinds of deals can´t be evaluated in terms of short-term financial impact. In any case, Yahoo! will still have more than $4 billion in balance sheet cash after paying for Tumblr. This is a big acquisition, but one that Yahoo! can afford.
Bottom line
Integrating Tumblr into Yahoo! Inc. (NASDAQ:YHOO) will be complex and risky, and there is no way to tell for sure if this will look like a smart move or a big mistake in the years to come. However, there’s one big question that needs to be answered: Is Yahoo! better off with an extra $1.1 billion on the balance sheet, or is the company better positioned with Tumblr instead?
Considering the company’s needs and the possibilities that Tumblr opens for Yahoo!, investors should feel good about this deal.
The article Yahoo!’s Risky but Smart Decision originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés Cardenal owns shares of Google. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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