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Yahoo’s Buyout of Tumblr Is a Bonehead Move

Yahoo (YHOO) dropped $1.1 billion in cash this weekend to pick up young, hip blogging property Tumblr.

The Yahoo-Tumblr deal was heralded by some as a much-needed power grab for a younger demographic and an ambitious play under the new Yahoo helmed by ex-Google (GOOG) guru Marissa Mayer.

I think the move is just plain dumb.

There are a host of challenges in turning this into a deal that pays off for YHOO, but here’s a short list:

No Guarantees: Younger web users are notoriously fickle, and there’s no guarantee the loyal and young demographic will stick — especially if they sense the Yahoo brand creeping in on their turf. But beyond that, even if YHOO doesn’t tarnish Tumblr, there are no guarantees. Remember GeoCities? MySpace? Have you heard the very real talk about Facebook (FB) fatigue? Young web fads are very often here today, gone tomorrow.

Integration Challenges: To keep users happy and mitigate flight risk, Tumblr CEO David Karp will apparently stick around and operate his blogging platform as an independent business in the near-term. But how is that a good thing business-wise? Tumblr lost money on just $13 million in revenue last year, and Karp has been openly resistant to traditional display advertising — Yahoo’s primary revenue stream. This doesn’t bode well.

Overpaying: John Saroff over at Fortune writes that the 60 billion or so page views per year on Tumblr “will spin off $108 million per year if a net $1.79 RPM (revenue per thousand pageviews) is achieved.” Wow, so even if integration is achieved and ads are layered in without a hitch, it will take more than 10 years for the Tumblr deal to be paid for? Such a bad move … especially considering other recent grabs at hot, young properties. I’m thinking the billion-dollar Instagram buyout from Facebook that hasn’t borne fruit, and the almost instant writedown of OMGPOP by video game shop Zynga (ZNGA).

There are pluses, of course. These include the chance of integration between Yahoo! photo sharing property Flickr and image-heavy Tumblr blogs and the fact that Tumblr is very much plugged into mobile while Yahoo isn’t. But I don’t think the pros come close to outweighing the cons.

My two cents is that Tumblr will continue to operate as an independent business, staying unprofitable or breakeven for the next several years as Yahoo continues to struggle.

You might wonder why I keep saying that Yahoo is struggling when the stock is up 33% year-to-date and more than 70% in the past 12 months to challenge levels not seen since 2008.

Well, Yahoo is seeing a better bottom line because of its remaining stake in Alibaba Group — not any structural fix to its continued problems tackling mobile and replacing traffic lost by a declining “portal” model.

Case in point: In April, Yahoo beat on the bottom line but missed on sales as display advertising revenue declined 11%, which was worse than expected.

Tumblr clearly can’t fix this display ad vacuum. And despite improving profits, YHOO hasn’t shown much of a plan to prop up or replace declining display revenue.

To be clear, this megashift away from the portal model is not just a Yahoo problem. AOL (AOL) is also hurting big-time as people visit their once-dominant homepage much less as they check mail elsewhere and use social media like Facebook and Twitter to get the news they like most. The same goes for Microsoft (MSFT) property MSN.com.

But just because misery loves company, that doesn’t mean Yahoo’s challenge is any less miserable.

Yahoo might indeed find a way out of this mess long-term, and Wall Street certainly seems willing to give CEO Marissa Mayer a chance as it bids shares higher.

But big-picture, I think the Tumblr deal doesn’t do anything to change the narrative.

Whatever that’s worth, of course. I’ve been bearish on Yahoo since March and the tape continues to tick higher. But I like to think that I’m not wrong on Yahoo … just a bit early.

If you’re sitting on a nice gain in YHOO stock, I’d get while the getting is good.

Related Reading

  • John Saroff has a great take on the Tumblr deal with a lot of numbers showing why Yahoo is making a mistake here. (Fortune)
  • Mayer is gambling $1.1 billion on a quest to be “cool.” (Time Business & Money)
  • Ingrid Lunden’s headline says it all: “Hell No, Tumblr Users Won’t Go to Yahoo!” (TechCrunch)
  • Peter Kafka thinks the Yahoo-Tumblr deal is all about user-generated content, not about display ads. (AllThingsD)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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