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Two Companies Yahoo! Inc. (YHOO) Should Buy Instead of Tumblr

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After snatching up Tumblr and now on the prowl for Hulu, Yahoo! Inc. (NASDAQ:YHOO) should instead buy some established growth companies. At the end of last year, Yahoo suddenly became cash rich after cashing out of a large investment in Alibaba. The company is now using the cash to buy well-known growing brands, but will it work?

Yahoo icon

Yahoo is following in the footsteps of the Facebook Inc (NASDAQ:FB) purchase of Instagram for $1.0 billion in the hopes of monetizing a vast and growing user base. The company paid roughly $1.1 billion for hot blogging network Tumblr that only has a revenue base of around $13 million. The question remains whether Yahoo! Inc. (NASDAQ:YHOO) would be better off making a large purchase of an under monetized asset or go for some of the public firms already on successful monetization paths?

Is Hulu the best option?

According to AllThingsD, Yahoo is bidding in the range of $600 million to $800 million for Hulu. At the top end of the range, Yahoo! Inc. (NASDAQ:YHOO) will have spent nearly $2 billion on the two purchases. This move comes after failing to obtain a stake in French video site Dailymotion and comes amid numerous other bidders for the site making a deal hardly assured.

What does Yahoo! Inc. (NASDAQ:YHOOget in the deal? According to this article, Hulu has a revenue base of $695 million for its video streaming service. The site has 10 million people visiting its website with over 3 million paying subscribers. While the subscriber base isn’t impressive, the revenue total is much more attractive than Tumblr.

Leading independent mobile ad network

A more intriguing purchase would be the leading independent mobile ad network, Millennial Media, Inc. (NYSE:MM) that currently has a market cap of only $655 million. The company works with most of the Ad Age leading advertisers and would provide Yahoo with an immediate large presence in the mobile ad space.

Analysts forecast the company to generate $275 million in revenue this year growing at a 55% clip. Millennial Media is also expected to be slightly profitable this year providing Yahoo! Inc. (NASDAQ:YHOO) a base to build upon with its massive sales force as opposed to needing to derive a monetization plan.

With the stock down massively since the IPO back a year ago, investors are unlikely to jump at any mild premium so price could become a major sticking point. The company though provides access to data from 420 million monthly unique mobile visitors globally.

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