Reports suggest Yahoo will invest $20 million in Snapchat, as a part of a financing round that would give the ephemeral messaging app a $10 billion valuation. If it does, it would be joined by among others Kleiner Perkins, who agreed to commit $20 million to the round in May. But how will these investment fit into cash-rich Yahoo’s post Alibaba plans?
The move could be viewed as a new iteration of Yahoo’s decision to invest in Alibaba in 2005, when the Chinese e-commerce giant was still just a promising upstart. While it is true that the cash would come from Yahoo’s $5 billion windfall from the Alibaba IPO, the deals are in fact substantially different. When Yahoo acquired its stake in Alibaba, it did so for $1 billion, fifty times more than what it would spend to purchase equity in Snapchat. Since then, Yahoo has seen its initial financial commitment in Alibaba grow a staggering 51x. For Yahoo’s proposed Snapchat investment to experience the same multiple increase, it would need to see Snapchat valued at $501 billion, a valuation over 30% higher than Google’s current market cap. Even in this highly unlikely event, Yahoo’s share would be worth just $1 billion, a long way from the $36 billion value of its stake in the pre-IPO Alibaba.
Snapchat has already achieved a multi-billion dollar valuation without generating any significant revenues, let alone a profit. While the company does plan to unveil disappearing advertisements and news articles this month, investors are certainly putting a lot of faith in Snapchat’s ability to capitalize on its over 100 million users. Yahoo is likely looking to Facebook as precedent. At three years old, Snapchat is the same age that Facebook was when it received a one-quarter billion dollar investment from Microsoft. At that point it was valued at $15 billion. Facebook’s current market cap is $202 billion.
The rumors come during a turbulent time for Yahoo CEO Marissa Mayer. Last week, the New York-based activist hedge fund Starboard Value, led by CEO Jeffrey Smith, bought shares in Yahoo in order to call for either a dissolution of the company or a merger with AOL. Starboard has previously initiated the corporate restructuring of Office Depot, Inc. and TriQuint Semiconductor, Inc. Mayer, meanwhile, became the CEO after Daniel Loeb and Third Point LLC purchased a 5.2% stake in the company in 2011 and called for the ouster of former CEO Scott Thompson.
After Bloomberg first reported the Snapchat deal was close on October 3, Yahoo shares rose 1.3% to $41.03 by the close that day. Since then the stock has reached as low as $40.33, but now stands at $41.22 as of 2:30 pm in New York.
Investors would most likely want to see the money from the Alibaba deal returned to them rather than invested in perceived risks such as Snapchat. However, they will be kept happy if Snapchat does manage to monetize its huge number of users – as long as nobody expects the kind of return Alibaba delivered.