Buying Yahoo! Stock? Keep an Eye on This

All right, so unless you've literally been living under a rock, you've likely already heard of Yahoo!'s acquisition of Tumblr for $1.1 billion. Yahoo! has now snatched up 10 companies since CEO Melissa Mayer took over.

Mayer announced the acquisition with an animated GIF, in an attempt to match Tumblr's content style and quell fears that Yahoo! will change Tumblr's free-wheeling nature. But with the purchase of Tumblr's uncensored and largely ad-free site, the company is going to face some difficulties transitioning Tumblr into the Yahoo! fold and making money from it.

Making a clean sweep
Tumblr is Yahoo!'s way of jumping head-first into social media (welcome to the 21st century!). The company hopes to increase web traffic and Internet credibility with its purchase.

Business Insiderreported back in January that Tumblr made $13 million in revenue in 2012 and was expecting to make $100 million this year. The company's advertising revenue comes mainly through campaigns that companies build, which are more like interactive posts designed to become viral messages, rather than traditional display ads.

But the problem with relying on these numbers is that even though Yahoo! is keeping Tumblr's founder, David Karp, at the helm of the company, Tumblr users aren't likely to take more advertising lying down. Tumblr has already experienced tens of thousands of posts being exported to WordPress because of the acquisition. That's nothing given Tumblr's 51 billion posts, but it's a bad sign for Yahoo!, which needs Tumblr's traffic and potential advertising revenue.

On top of this, Yahoo! doesn't know the world of blogging like Tumblr does, and although Karp will lead Tumblr for the next few years, you can bet that Yahoo!'s not going to spend $1 billion without wanting to make some changes of its own to the site. Yahoo! will be tempted to make its money back in ways it hasn't been able to make money from past acquisitions (ahem, Geocities).

And therein lies the difficulty with the acquisition. Yahoo! bought a website with limited advertising that users like because it's largely uncensored. Now it will need to increase advertising in order to make its purchase worthwhile, and will probably want to clean up parts of Tumblr that are a little rough around the edges to fit into Yahoo!'s more corporate personality. Neither of these pursuits are likely to go over well with many of Tumblr's users.

Keeping up with the Joneses
Having said all that, I don't think Yahoo!'s Tumblr purchase was the wrong move. Rival Google dominates everything from search advertising to video content and mobile operating systems, so Yahoo! needs to make bold moves in an attempt to diversify its offerings and stay relevant with online users. Google has built its ecosystem across a variety of applications, platforms, and devices -- and done so very successfully. Yahoo!'s latest big bet is an attempt to do the same.

On the social media side, it's hard not to compare the Tumblr acquisition to Facebook's purchase of Instagram last year (also for about $1 billion). While Facebook is the social media giant, its purchase of Instagram showed that it still fears competitors and needs to adapt to shifting user preferences. Yahoo! may not be as influential as Facebook, but it does realize that buying up popular content creation tools can keep a company relevant.

In the end, it'll be Tumblr's revenue that will be the measuring stick for Yahoo! stock investors. Popularity is great, but Yahoo! needs to make money from Tumblr. If the company fails to do that, it will not only have wasted $1 billion, it will have wasted time on yet another failed acquisition.

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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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