Yahoo buying Tumblr wins analyst approval

Yahoo Chief Executive Marissa Mayer’s $1.1 billion acquisition of blogging service Tumblr will be a test of her ability to revive the aging Web portal. Luckily for her, her performance may be graded generously.

Mayer faces plenty of challenges in her efforts to turn six-year-old Tumblr into a money-spinner, not least among them retaining users while devising new types of nonintrusive online ads outside of Yahoo’s traditional area of expertise.

And then there is Tumblr’s hefty price tag: A sum that equates to a fifth of Yahoo’s cash.

But some investors and analysts say that Wall Street is more focused on the rising value of Yahoo’s Asian assets, such as its 24-percent slice of China’s Alibaba, than on actual business operations. That means the 37-year-old executive faces less immediate pressure to prove that Yahoo’s biggest acquisition in years is a profitable one.

“Overall I’m relatively skeptical, but I don’t think it matters much to the stock,” Macquarie Research analyst Ben Schachter said of the deal.

“Say they destroy 100 percent of the value and drive Tumblr into the ground,” he said. “It’s probably less than a dollar per share in value.”

If Mayer’s bet delivers, however, some investors say it could provide even more upside to a stock already trading at its highest levels in years.

“The core business is the lottery ticket,” said Ryan Jacob, the chief executive of the Jacob Funds, who owns Yahoo shares. “Investors’ expectations for the core business are very low, so if they’re able to reinvigorate growth, that will move the needle.”

Yahoo remains one of the Web’s most popular destinations but has seen its revenue shrink in recent years as consumers and advertisers favor rivals Google and Facebook.

By buying Tumblr, Yahoo gets a much-needed platform in social media to reach a younger generation of users less enamored of Yahoo’s traditional Web content and e-mail.

Yahoo is paying a rich premium for Tumblr, whose nascent advertising efforts generated a scant $13 million in revenue last year, according to media reports.

“Tumblr has low revenues and a big multiple, but far-sighted buyers in technology have shown that they can take small properties and put them onto their distribution system and do good things with them,” said Adam Seessel, head of Gravity Capital Management, which owns Yahoo shares.

Take Google’s $1.6 billion acquisition of YouTube, Sessel said. That deal gave the search giant an important video service that boosted interaction with Google’s other online services, he said.

Mayer stressed Yahoo’s commitment to create new so-called “native ads” that mesh seamlessly into Tumblr’s content and are considered more suited to the service than the traditional online display ads that have long been Yahoo’s bread-and-butter.

“We have gotten more and more focused on providing native ads and designing ads for that experience, so that’s what we’re going to get really focused on,” Mayer, a former Google executive, told Reuters in an interview late Monday.

But creating a class of ads that works is no simple feat. “There isn’t a template to do it,” said Rebecca Lieb, an analyst with research and consulting firm Altimeter Group.

Yahoo must also hold onto Tumblr’s bloggers, many of whom were already stomping their feet at being assimilated into the decidedly “less cool” Yahoo. Many vented their frustrations on the Tumblr blog entitled “Meltdowns about Yahoo buying Tumblr.”

Reuters