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By Moving to Acquire Tumblr, The Reasons to Own Yahoo! Inc. (YHOO) Have Completely Changed

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Yahoo! Inc. (NASDAQ:YHOO)’s board agreed to buy blogging website Tumblr on Sunday for $1.1 billion. Even in the unlikely event that the deal doesn’t go through, the move to acquire Tumblr has radically altered the outlook for Yahoo’s stock.

Yahoo! was a capital return story

Since activist shareholder Dan Loeb got involved in the fall of 2011, the case for Yahoo! Inc. (NASDAQ:YHOO) has really been about potential capital returns. As Loeb fleshed out in his original presentation on the company, Yahoo! holds valuable, non-core assets: Alibaba and Yahoo! Japan.

Yahoo! tumblr

Yahoo! Inc. (NASDAQ:YHOO) sold part of its Alibaba investment last summer, generating roughly $7.6 billion in cash. Of that money, slightly less than half of it ($3.65 billion) was promised to be returned to shareholders in the form of a stock repurchase program.

Of course, Yahoo! Inc. (NASDAQ:YHOO) still retains the rest of its Alibaba stake, and Yahoo! Japan. Bullish investors may have believed that these assets were due to be monetized in the coming quarters, and much of that cash returned to the company’s shareholders.

Analysts at Oppenheimer upgraded Yahoo! Inc. (NASDAQ:YHOO) to an Outperform rating in March, with a $27 price target. That upgrade was predicated largely on a bullish outlook for Alibaba’s coming IPO and Yahoo! Japan.

Likewise, analysts at Topeka Capital initiated a Buy rating on Yahoo! in April. The catalyst? The appreciating value of Yahoo’s Alibaba stake.

Is Third Point about to exit its Yahoo! stake?

Shares of Yahoo have rallied more than 100% since September 2011 — when Dan Loeb’s Third Point first took an activist stake in the company. With such a tremendous return, could Loeb be looking to exit?

It wouldn’t surprise me. According to the fund’s most recent 13F, Third Point sold about 10 million shares of Yahoo! in the first quarter. It was still the fund’s largest holding as of the end of March, but it appears that Third Point may be moving on.

Loeb’s recent decision to take on Sony could prove to be his most ambitious yet. With limited capital, both the firm’s focus and money could be shifting away from Yahoo! in favor of the Japanese electronics maker.

Can Yahoo reinvigorate its rivalry with Google Inc (NASDAQ:GOOG)?

A decade ago, Yahoo! and Google Inc (NASDAQ:GOOG) were battling for search engine dominance. That’s clearly no longer the case. Yahoo remains one of the Internet’s premiere websites, but it has fallen far behind.

Yahoo’s CEO Marissa Mayer laid out her vision for the company quite clearly. In the short term, become the go-to destination for everything people do on their mobile phones (email, weather, sports, etc.). Over the longer term, Yahoo! wants to be a player in the emerging field of pre-emptive search.

That technology is embodied most clearly in Google Now, Google’s virtual personal assistant. Unlike Apple Inc. (NASDAQ:AAPL)’s Siri, Google Now is capable of anticipating its user’s queries and responding in advance.

For example, Google Now can learn its user’s daily routine (for example, where and when they go to work) and then deliver pertinent information in advance (traffic congestion).

In an interview with Bloomberg, Mayer explained how she envisions search evolving:

“In the future, you become the [search] query…You could just be the query passively — this is the notion that, if we can pick up on the context of who you’re taking to, where you are — can we actually provide useful information?”

Yahoo’s acquisition spree

Of course, Google Now is only capable of providing useful information to the users that it knows well. How does it learn about its users? By being integrated with Google’s other services.

For example, Google Now can scan the user’s gmail account for recent online purchases. It can then absorb this information, and alert the user when these items have been delivered. Another example: if a user had been searching for a movie on their desktop computer using Google’s Chrome browser, Google Now will send the user upcoming movie times for the film they had been looking at.

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