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Yahoo! Inc. (YHOO): It’s All About Traffic

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Internet giant Yahoo! Inc. (NASDAQ:YHOO) recently announced the purchase of New York-based Tumblr for more than $1 billion in cash. Founded in 2007 and employing 175 individuals, Tumblr has more than 117 million unique visitors per month, most of whom are teens and young adults.

Many investors raised an eyebrow when Yahoo! first announced it reached an agreement to acquire Tumblr, asking why is Yahoo! Inc. (NASDAQ:YHOO) paying so much money for a six-year-old company that has no profit and barely any revenue?

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Why the deal makes sense

Historically, Yahoo! Inc. (NASDAQ:YHOO) invested tremendous efforts to replace the dominance of Google Inc (NASDAQ:GOOG) as the most important search engine in the world. Marissa Mayer, Yahoo!’s CEO, turned around the company investors were accustomed to, and the recent acquisition of Tumblr might become her best investment since taking the position last summer.

Yahoo! CEO Marissa Mayer recently told CNBC: “We bought a growth opportunity. We’ve been very clear that our goal is to grow, to grow with the market and eventually to grow faster than the market. Tumblr is hyper-growth. The massiveness of that user base is amazing, so growing our audience by 50% to more than 1 billion users per month, that is huge.”

In other words, Yahoo! finally realized that traffic is the name of the game and wants to get a footprint into the important world of social media.

Much of the content users post and consume on Tumblr, such as fashion, art, food and travel, does not overlap with Yahoo!’s content, with the exception of sexually oriented content posted on Tumblr, which is already becoming a controversial issue. Yahoo! Inc. (NASDAQ:YHOO) is strong in categories such as sports, finance and news. By all means, the acquisition is a big bet for Yahoo! given Tumblr’s financial performance. Yahoo! is willing to gamble in order to deliver growth to its investors.

Google and Facebook are acting similarly

Yahoo! is basically following the same business philosophy that Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG) have been implementing for years. Facebook acquired Instagram and Google acquired YouTube for $1 and $1.6 billion, respectively. In both cases, the target companies had little-to-no revenue but demonstrated strong traffic potential.

The battle between two of the world’s mammoth companies, Yahoo! and Facebook, goes way back. Last year Yahoo! sued Facebook for violating patents that belong to it. Facebook on the other hand, fought back and settled most charges. In addition, the “word on the Street” is that Facebook would like spoil the Yahoo!-Tumblr deal. One can certainly note that the world of social networking and search engines has never been more vulnerable.

Furthermore, not only has Yahoo! Inc. (NASDAQ:YHOO) been losing the battle over social networks to Facebook, but it also lost the battle against Google in the world of search engines during the past decade. I truly believe the purchase of Tumblr represents an opportunity for Yahoo! to come back as an important factor against Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). Needless to say that number of users is a key factor here and an important growth engine for the three companies.

Facebook has almost 1.1 billion users worldwide, followed by Google with almost 1 billion monthly unique searches, while Yahoo! has 620 million unique visitors per month. But now with Tumblr, unique users certainly puts Yahoo! “back on the map.”

According to Yahoo!’s May 20 letter to shareholders, Tumblr site has 300 million active monthly users, meaning, Yahoo! is paying around $3 per user, while Facebook Inc (NASDAQ:FB) paid around $30 per Instagram user; apparently Yahoo! Inc. (NASDAQ:YHOO) is doing a good deal. Moreover, Tumblr did not place ads on its blog until last year, focusing instead on enlarging its user base while having a lower priority on revenue.

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