Will Yahoo! (NASD: YHOO) Return To Glory?

Yahoo! (NASD: YHOO) is aiming to reverse its fortune, and while it has historically committed to organic growth, it has now deviated from this trend. The recent news of the firm buying Internet blogging startup Tumblr for $1.1 billion in cash has led to immediate criticism from the analyst community. The biggest concern raised by analysts is that while Tumblr is interesting, Yahoo overpaid for it, since it is not a viable revenue generator. Also of concern is the stark difference in the corporate vision and culture of both entities.

Yahoo! recently hired a new CEO in Marissa Mayer, tasked with reversing the firm’s fortunes. The company is hoping she will be able to restore its reputation, especially in dealing with Internet startups.

Past failures in this area were seen with GeoCities which was acquired for $3.6 billion, and the photo-sharing site Flickr which came with a $35 million price tag. Both of these startups were underutilized by the company, leaving Yahoo! open to the criticism of a similar outcome for Tumblr. One of Mayer’s first major tests in Yahoo!’s lead position will be to find ways of matching Tumblr’s social network with Yahoo!’s goals. The company hopes to re-establish its previous dominance in digital advertising as well as build a larger presence on mobile devices. Tumblr’s reported revenue for 2012 was $13 million. This figure was matched in the first quarter of 2013, but the company’s goal of reaching $100 million by the end of this year look’s questionable. Tumblr ran through $25 million in cash last year, so it will take innovative alternatives to traditional web advertising to reverse these trends and positively contribute to Yahoo!’s profit performance.

Yahoo! has been struggling to grow, and as a result, fell behind, when it came to ad revenue. When it reported its first-quarter earnings earlier this year, Yahoo! showed that revenue from display ads was down 11% to $455 million compared to the first quarter of 2012. The number of ads sold decreased approximately 7%. Revenue from search was also down. It fell 10% to $425 million.

Yahoo! needs to improve its display ad revenue, and Tumblr is not likely to help do that. Mayer has shown a willingness to pursue new strategies in an effort to restore glory to the firm, but it is hard to believe how much the firm has fallen, so quickly. The firm once was neck and neck with Google (NASD: GOOG), but that changed years ago and this one acquisition is unlikely to significantly change that.