Yahoo! – Fire in the pocket

At $10bn, even a financial return looks to be a challenge.

• Yahoo! has made a huge return from its investment in Alibaba but its fiduciary duty to prudently invest on behalf of investors remains unchanged regardless how much money is in the bank.
• Snapchat appears to be raising yet another round of financing this time at a $10bn valuation which Yahoo! is thought to be leading with a $20m investment.
• This figure needs to be verified as last time around it appeared that Snapchat raised money at $2-3bn but the real valuation was $500m. (see here)
• The latest estimate for Snapchat is that it has around 100m active users (see here).
• Assuming that the $10bn figure is correct, this means that Yahoo! would be investing at a valuation of $100 / user.
• This is 2.5x the valuation that Facebook paid for Whats App, and I continue to struggle to see how Facebook will make a decent return from paying $40 per user.
• The only way I can see this working is for Facebook to integrate Whats App and to offer gaming across that platform.
• This is an area where Line and Kakao Talk have seen great success.
• Yahoo!’s investment at $100 per user sets the bar 2.5x higher and with only a 0.2% stake (Yahoo! is investing $20m) it will have no say in how the company formulates its strategy.
• Hence there will be no integration of Snapchat into Yahoo! and even if it did, I can’t see how this would help Yahoo!’s ecosystem strategy.
• This is because Yahoo! already has a messaging system which could be easily adapted to offer similar functionality to that offered by Snapchat.
• Furthermore, I do not believe that teenagers with no money to spend are worth $100 each.
• Snapchat would have no impact on Yahoo!’s coverage of Digital Life and also little help in evolving the functionality and appeal of its ecosystem.
• This basically leaves Yahoo! as purely a financial investor in Snapchat.
• From this perspective, paying $100 per user for kids who generate no revenues whatsoever looks like a loser to me.
• Snapchat’s user base is big but it is not growing explosively, meaning the kind of user base that is needed to justify this kind of valuation is unlikely to ever happen.
• Consequently, I think that this investment will be a loser for Yahoo! and am increasingly concerned that the company lacks the depth of management required to execute on the excellent assets it already has.
• I worry that Yahoo! now has too much money which makes it easier to internally justify a process that ends up wasting money.
• I continue to be of the opinion Alibaba related profits should be taken in Yahoo! as there is no sign of a turnaround in the underperforming core business
• It is this business that is likely to drive the share price in the short term.