Tech Bubble Death Watch: Yahoo's Tumblr Valuation Is Not Too Bubbly

It may be time to start worrying about a tech bubble again.

OK, not really "worrying" so much. But the news that Yahoo has paid a fairly whopping $1.1 billion to buy meme-n-porn blogging site Tumblr is enough to get us at least sniffing the air for the faint scent of dish soap. Tumblr's valuation may not be bubbly, exactly, but it is arguably expensive.

It is certainly enough to inspire The Huffington Post to re-launch its short-lived feature, the "Tech Bubble Death Watch." The original Death Watch was inspired by the lunatic hype surrounding the Facebook IPO. Facebook's floptastic debut temporarily deflated any nascent tech bubble. And there is still little risk, really, that technology stocks are in a dangerous bubble that will destroy all of our money.

But Yahoo paid a pretty steep premium for Tumblr, rich enough to awaken the Death Watch, which has waited, dreaming, in the underwater city of R'lyeh for the past year.

One potential problem is that Tumblr does not, how do you say, make any money. The plan is that it eventually will do so, but just how much money it will make is still a question. Jefferies analysts, in a research note, suggest that Yahoo will have to rake in an extra $950 million in advertising revenue to justify the purchase. This sort of thing is hilarious, and so is this, but is it $950 million worth of hilarious?

RBC analysts warn that there won't be any revenue benefit this year or next, with a return on investment that "won't be clear for several years."

Yahoo could certainly argue that the coolness and hipness of the eyeballs that follow Tumblr, along with Tumblr's presence in social networking and on mobile, justifies the purchase price. But many of those young, hip eyeballs may flee if they are suddenly assaulted by unhip advertisements, many analysts warned.

Also, Yahoo has not exactly been the world's champion at acquisitions in its history -- hence Marissa Mayer's less-than-inspiring promise "not to screw it up."

All that said, this is not even close to being Yahoo's most expensive purchase, as Slate's Matthew Yglesias pointed out. Tumblr may yet turn out to be Geocities, but at least Yahoo is not paying an inflation-adjusted $5 billion for Geocities again, as it did at the height of the bubble in 1999.

The $1.1 billion Yahoo is paying is not really all that much more than the $800 million valuation venture capitalists hung on Tumblr two years ago, according to the Wall Street Journal.

Yahoo shareholders are not exactly alarmed, pushing Yahoo stock slightly higher on an otherwise down day for the stock market.

The Yahoo-Tumblr deal has stirred the Death Watch from its slumber, but is not yet enough to make us raise our threat meter above 2, marking a "guarded" risk of a wealth-destroying tech bubble.



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