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YHOO CEO Marissa Mayer Stumbles Over Tumblr

Back in 2013, a number of major events sent shockwaves through the nation.

yhoo alibabaThe hit song “Thrift Shop” from Mackelmore and Ryan Lewis made millennials think bargain hunting was cool. Walt Disney Co. (NYSE:DIS) released its mega-hit Frozen on the world, much to the chagrin of the parents of toy-obsessed children.

Oh, and in the world of finance, Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer made her biggest gamble yet with a $1.1 billion acquisition of blogging network Tumblr.

Mayer was proud of the Tumblr deal from the get-go and went out of her way to assure Tumblr’s legions of fans that nothing was going to change. Mayer kept founder David Karp as CEO, and Yahoo even promised it wouldn’t “screw-up” Tumblr.

For a while, Mayer kept her word. According to Business Insider, Mayer was “determined to prevent Tumblr from becoming a ‘shiny new toy’ for Yahoo executives to play with.”

Yahoo told Wall Street last year that Tumblr would generate $100 million in revenue in 2015 and was going to achieve positive EBITDA. The company, which reportedly was going to make Tumblr Yahoo’s answer to Google Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube, made these claims in response to a challenge from activist investor Starboard Value.

Now, all bets are off.

Tumblr Was a Bad Deal for YHOO

According to recent reports, the integration of Tumblr into Yahoo hasn’t gone as well as Mayer might have hoped. Karp will now report to Simon Khalaf, who comes to the helm at Tumblr from Flurry’s mobile analytics unit. As Market Realist points out, “This is a demotion for Karp.”

This change in management has raised doubts about whether Tumblr would reach its $100 million revenue goal, and if that’s the case, investors can bet that the positive EBITDA promise forecast probably isn’t going come true either.

If the report is true, (Yahoo hasn’t denied it,) Karp will head for the exit. Entrepreneurs start their own businesses mainly because they want to be their own boss. Mayer, though, clearly wanted to keep Karp around, which is why she offered him autonomy in the first place.

I might have understood the offer for Tumblr if the company was profitable, but Tumblr was struggling when YHOO acquired it. Why else would Karp sell out instead of taking the company public? After all, investors don’t seem to be bothered by IPOs of unprofitable companies — just look at the Godaddy Inc (NASDAQ:GDDY) IPO. Shares of the Internet domain registration and business services company surged 30% in its first day of trading. It hasn’t made a dime in years.

Marissa Mayer Is Captain of a Sinking Ship

So what now? There are even more disturbing rumors that Yahoo is thinking of buying cable television networks such as Time Warner’s (TWX) CNN and Scripps Networks (SNI), parent company of the Food Network and the Travel Channel. I guess Mayer isn’t worried about the huge decline in cable network ratings.

Then there’s the ad business. As eMarketer recently noted, Twitter (TWTR) is poised to overtake YHOO as the third-largest seller of online display advertising. The microblogging site also is beating Yahoo in the fast-growing mobile market, earning about $380 million last year versus $250 million for Mayer’s company.

Question about Mayer’s credibility at a time when she can least afford them. Ever since the Yahoo spun off its $39 billion stake in Chinese Internet giant Alibaba Group Holding Ltd (NYSE:BABA), investors can now see the real YHOO, and its not a pretty sight.

Bloomberg View’s Katie Benner summed up the situation well:

“None of Yahoo’s nascent moves in mobile, native advertising, social media or video are growing fast enough to offset its shrinking core business. Together these new businesses comprise about a fifth of the company’s revenue — so 20 percent of the business is growing while 80 percent is shrinking. Little wonder so few people are clamoring for the CEO job at Yahoo.”

I guess the upside for Mayer is job security, but it doesn’t offer much comfort to shareholders. Anyone who owns YHOO stock might as well hold onto it on the odd chance that Mayer may be able to orchestrate a merger with AOL, Inc. (NYSE:AOL) or someone else.

Otherwise, stay away from YHOO stock. There isn’t much to like here.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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