Will Yahoo Successfully Integrate Tumblr To Pay For Its Pricey Acquisition?

Yahoo!, (NASDAQ:YHOO) ) in an effort to reinvigorate its brand image and product line, bought the online blogging platform Tumblr for $1.1 billion. Yahoo is paying all cash for Tumblr from its stash of $7.6 billion that it had collected from the sale of its stake in Chinese Internet Company Alibaba Holdings Group.

With this acquisition, Yahoo’s unique visitor count will increase to over 1 billion unique user per month. Additionally, Yahoo also gets access to 60 billion blog posts on Tumblr that can be monetized through its advertising network. However, we are concerned about the price Yahoo has paid for this acquisition. In this article, we look at whether Tumblr’s $1.1 billion valuation is justified or not. We will also discuss the challenges that Yahoo might face in integrating Tumblr.

See our complete analysis of Yahoo! here

Tumblr Richly Valued

Yahoo paid $1.1 billion for Tumblr’s 300 million unique user base that generate over 60 billion page views annually. ^[1] We looked at a some metrics to evaluate whether Tumblr’s valuation makes sense. Our analysis is as follows:

Source:- Trefis Estimates

We compared the online ads business of three companies on value to sales ratio. While we know Yahoo valued Tumblr at $1.1 billion, we have estimated the value of AOL and Yahoo’s online business by subtracting the value of non- online businesses, cash and investments from our estimated value of each company.

For 2013, we project that Yahoo will generate $4.5 billion and AOL nearly $1.6 billion in revenues from their online business. Additionally, we estimate that Tumblr can make $87 million in revenues for 2013 based on 60 billion page views that it generates. These page views can be monetize at Yahoo’s historical $1.45 revenue per thousand page views (RPM).

After analyzing the value per sales multiple, we have concluded that Tumblr is richly valued at 12.64x its value to sales multiple compared to 1.85x and 0.87x for Yahoo and AOL respectively. Tumblr launched its ad revenue campaign in May last year and could generate only $13 million. We, therefore, are concerned that if Yahoo fails to monetize this platform to the projected revenues, this multiple might even be higher.

Challenges Facing Yahoo

Tumblr has witnessed rapid growth in the past few years and it continues to add 120,000 new user per day to its website. Yahoo firmly believes that it can monetize Tumblr successfully and also retain most of its 300 million unique users. However, Yahoo will have to overcome a number of challenges to successfully integrate this business in its portfolio.

1. Yahoo needs to overcome Tumblr’s resistant to ads:  Yahoo plans to monetize this platform by placing display ads on Tumblr. Many of Tumblr users including its CEO David Karp, have raised their concerns about commercializing Tumblr platform through ads. We, therefore, believe that display ads might not fit well with many of Tumblr’s users who are accustomed to the ads free Tumblr interface. If Yahoo were to introduce any display ads, it might lead to a backlash from Tumblr’s user base as they might leave the blogging platform. However, if Yahoo can come up with a strategy that will monetize the platform without high attrition rate of users, Tumblr could add millions of dollars to Yahoo’s topline.
   
2. Monetizing Tumblr content will be difficult: Tumblr is a micro blogging site that does not own any of its page views. Instead, page views are owned by bloggers who share their views on this platform. Yahoo, thus will have to come up with a strategy to appease these bloggers to display ads across their web pages. Moreover, as most of the content on Tumblr is user generated, it lacks the brand image associated with premium content available on some other websites such as NYT, Yahoo and AOL. Tumblr did try to monetize this content by launching its native ads program last year, but it failed to generate sustainable cash flows and brought in only $13 million in revenues. Yahoo, therefore, will have to come up with a strategy  that makes this platform attractive to advertisers and users alike.
   
3. Yahoo needs to Protect Tumblr’s turf: WordPress and Blogger once led the blog space worldwide. However, Tumblr’s  has taken over the mantle since its launch and now has over 60 billion blogs. We believe that the barriers to entry in this industry are extremely low and Yahoo will have to figure out Tumblr’s competitive advantage if it wants to protect its $1.1 billion investment.

We conclude that although Yahoo’s acquisition of Tumblr looks costly, and a lot will depend on Yahoo’s strategy going forward. As more users generally consume more content, an increase in unique user count will augur well for Yahoo. If Yahoo can tightly integrate Tumblr’s and Yahoo’s content across its properties and increase user engagement, it can translate into more searches and eyeballs across Yahoo properties which will translate into higher revenues for Yahoo

We currently have a $23 price estimate for Yahoo!, which is approximately 10% below the current market price.

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1. Tumblr Blog Network, March 25 2013, www.quantcast.com [↩]