Yahoo! Inc. (NASDAQ:YHOO) board has approved the acquisition of the blogging platform and the deal has been announced on Monday. Normally analysts love mergers and scream about the magic word ‘synergies’. However, some (but of course not all) analysts are a bit skeptical about the price Yahoo! is paying for Tumblr. Despite Tumblr taking the crown as the 32nd most visited website in the world (according to Alexa.com), the firm only generated $13 million in revenue for 2012. Additionally, the firm lost money in 2012 and there are concerns about what Yahoo! will do with all that porn and how it can keep Tumblr ‘cool’. Earlier we brought you some commentary from Barclays on the purchase, below we bring you opinions from five other analysts covering Yahoo! Inc. (NASDAQ:YHOO).
Jefferies on Yahoo! Inc. (NASDAQ:YHOO) Purchase of Tumblr
Tumblr Is Arguably a Strong Content Creation and Social Sharing Platform.
Tumblr’s 10M+ registered users create 120,000 new blogs every day. There are ~100M in total thus far. The platform generated ~117M UV’s globally in the month of April +80% Y/ Y; ~30% of those were from the U.S. ~25% of the company’s traffic came exclusively from mobile (Comscore).
Tumblr Has Unique Psychographic Insight of its Audience. Each member of Tumblr’s audience is active on blogs in which he or she is the most interested. The audience can, through a dashboard, receive and share content on a wide variety of interests and subjects focusing on very niche interests. Arguably, advertisers who are looking for audiences not only by demographics but also by their interests should find a huge amount of value in advertising alongside niche blogs. But…
…Tumblr Doesn’t Make Money Right Now, It Barely Generates Revenue. Various media sources have reported that Tumblr does not generate much revenue as David Karp, CEO and founder, has resisted turning much advertising on the websites. Some media sources have reported that Tumblr generated $13M during 2012. It should be relatively straightforward for Tumblr to at least upload its (soon to be created) ad inventory onto Yahoo!’s Right Media exchange in order to rapidly start to generate revenue. However, the media reports that Yahoo! will run Tumblr autonomously in the near-term, so maybe we will not see this right away.
Even So, How Can a $1.1B Valuation Make Sense? In order to justify a $1.1B purchase price (or ~$1.10 per Yahoo! share), using a 11.5% hurdle rate (our estimate of Yahoo!’s WACC), Yahoo! would need to make ~$127M in after-tax earnings (11.5% * 1.1B). Applying Yahoo!’s average after-tax net margin of 13% (which excludes income from its stakes in the Asian assets, and is the equivalent to our FY13 forecast of 19% operating margin), implies that Yahoo! should, at a minimum, generate an additional ~$950M in advertising revenue annually in order to make this acquisition worthwhile (assuming a similar cost structure). Yahoo! is hosting a press event in the afternoon today in NYC to discuss the acquisition. We will pay particular attention to the details regarding the monetization strategy.
Tumbling for Growth and User Engagement… AllThingsD and the Wall Street Journal are reporting that Yahoo! Inc. (NASDAQ:YHOO) ‘s board has approved a $1.1 billion acquisition of Tumblr, a microblogging and social media website. The purchase price would represent 20% of Yahoo!’s cash/equivalents balance at the end of 1Q13, and roughly $1.00 per Yahoo! share. If true, we would view the acquisition as a positive for Yahoo! giving the Company access to one of fastest growing social media assets, as well as access to the teen demographic. Yahoo! Inc. (NASDAQ:YHOO) can then use its expertise in advertising to drive monetization of the Tumblr platform and achieve synergies by integrating Tumblr’s content into the Yahoo! site. Buy the stock.
Why it makes sense for Yahoo! Inc. (NASDAQ:YHOO) . At our J.P. Morgan Global TMT Conference last week, Yahoo! CFO Ken Goldman stressed the importance of regaining traction with 18- 34 year-olds and making Yahoo! cool again—we believe Tumblr could help. Yahoo!’s new homepage now includes a stream of more relevant third-party content and we believe Tumblr posts could be selectively integrated into Yahoo! over time, similar to how Tweets will now be incorporated into the Yahoo! newsfeed. Yahoo! may also be able to find ways for Tumblr and Flickr to work together (even without their e’s).
Advertising potential. Like other social and self-expression sites, Tumblr’s early years have been focused more on the user experience and growing the platform rather than monetization. However, Tumblr recently launched promoted post ads in the feed and we believe the company is seeing engagement rates several times the industry average. Tumblr’s feed ads have driven increasing CPMs over the last several months and the top 10 Hollywood studios are spending with Tumblr. While Tumblr likely needs to take its feed advertising slowly so as not to negatively impact the user experience, the company should be able to leverage Yahoo!’s sales force and advertising relationships. Marketers could get broad reach and coverage with Yahoo! Inc. (NASDAQ:YHOO) and a more curated experience through Tumblr.
What are the risks? Yahoo!’s track record with acquisitions has been weak, but that was before current management. Still, Yahoo! will need to balance its involvement with Tumblr to let the creative site flourish while also driving some benefits to core Yahoo!. Tumblr users also appear to be showing some early signs of push-back around a potential Yahoo! deal.
Should accelerate mobile usage and revenue initiatives
In the US, Tumblr has 15mn active mobile users (per comScore, mobile users up over 200% y/y) likely more than double for global users, and should help expand Yahoo’s mobile reach and activity. We expect Yahoo! Inc. (NASDAQ:YHOO) to monetize Tumblr content via homepage or dashboard takeovers (like YouTube home page ads) or with ads between content feeds, much like Facebook’s Sponsored Story ads or Twitter’s promoted tweets. Risks to Yahoo’s revenues from Tumblr include lower engagement if advertising dilutes the user experience, and copyright material claims if ad revenues significantly ramp.
Potential impact to financials
Tumblr currently has 184mn users and generated $13mn in revs last year and has plans to generate $100mn this year (per press reports and Wikipedia). Assuming that Tumblr could be on a path toward generating $2 per user per year (Facebook at $5/user but FB has over 6 hours/user/month vs. Tumblr at 40 minutes/user/ month in the US per comscore), we estimate that Tumblr could eventually generate over $400mn in annual revs. With just 175 employees today ($30-50mn in annual opex), we would think the company could be EBITDA profitable in ‘14.
We’re Neutral On This Deal – Strategically, this deal makes sense. YHOO’s fundamentals have been subpar for numerous years, in part because of the company’s missing presence in Social and Mobile. Tumblr may help Yahoo! Inc. (NASDAQ:YHOO) develop that presence. Tumblr has a highly engaged user base that skews to the younger demo, and has a relatively significant international presence – in 2012, more than 50% of its traffic was international. Yahoo! Inc. (NASDAQ:YHOO) expects the deal to increase the Company’s audience by 50% and traffic by 20%. Financially, we would expect the deal to be immaterial to YHOO. On its revenue base of almost $5B, YHOO is not likely to see a revenue impact from Tumblr in 2013 or 2014. That makes this a long-shot/longterm investment, the ROI on which won’t be clear for several years. And YHOO’s M&A track record has been very mixed, although the Company promises to continue to operate Tumblr independently.
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