Why is Alibaba Buying Into Snapchat's $10 Billion Valuation?

Joe Goldman |

snapchat valuation, snapchat alibaba, snapchat profit, snapchat edc, snapchat evan spiegelHot social media startup Snapchat is in talks to obtain financing from Alibaba at a $10 billion valuation, according to a report from Bloomberg.

Snapchat made headlines last year when it surprisingly turned down a $3 billion offer from Facebook (FB) , a bold move that is now paying off. The valuation would propel Snapchat into the elite ranks of Facebook, Twitter (TWTR) , Airbnb, and Uber as one of the new tech companies with a valuation of $10 billion or more.

Snapchat is a social media startup that enables users to send pictures to other users. The kicker is that pictures are removed from existence after they are viewed once, creating a more ephemeral and private social media experience. Snapchat has become immensely popular, reaching 700 million snaps and 500 million story views per day.

With Alibaba going public later this year, the Chinese e-commerce company is exploring all possible options to drive demand for its massive stock offering. Holding an investment in a hot high-growth asset like Snapchat would certainly help, but is Snapchat worth the price?

Questionable Leadership

Snapchat’s 24-year old CEO and co-founder Evan Spiegel has had his fair share of miscues and mess-ups, prompting many to called him arrogant and unfit to run a multi-billion dollar company.

Spiegel’s most recent debacle caught him in the middle of a PR firestorm. Spiegel was in the Kappa Sigma fraternity during his time at Stanford University, and a series of explicit and misogynistic emails to his frat brothers were leaked online. “I’m obviously mortified and embarrassed that my idiotic emails during my fraternity days were made public. I have no excuse,” he said in his apology statement.

Snapchat’s security was breached on New Year's Day this year when an anonymous hacker published the usernames and partial phone numbers of 4.6 million users. The hacker could have posted the full phone numbers if he wanted to, but seemed to be making a point about Snapchat’s lack of security. Spiegel never apologized for the breach.

Spiegel was also labeled as arrogant due to the way he dealt with Mark Zuckerberg prior to Facebook’s $3 billion offer. Their email exchange was leaked online, and Spiegel conveyed an “I don’t come to you, you come to me” mentality. Has Spiegel seen Facebook’s market cap recently?

 

 

With these mishaps aside, Spiegel is very intelligent and has an ambitious, creative vision for Snapchat’s future. Spiegel is 24 years old. With only a few post-college years under his belt, a massive net worth, and a legendary “no deal” slapped to the famous Zuckerberg, it would be shocking if Spiegel weren’t a little bit cocky.

Many businesses would view Spiegel’s actions as a red flag, but Alibaba doesn’t seem to care. For the Chinese e-commerce giant, Snapchat means business.

Why Alibaba Wants a Piece of Snapchat

Alibaba’s IPO could be the biggest of all-time, so the company will obviously do everything it possibly can to drive demand for its enormous stock offering. By purchasing a venture capital stake in Snapchat, Alibaba could be attempting to position itself as a global technology/Internet conglomerate, rather than a Chinese e-commerce business.

From an investment and monetization perspective, Snapchat is also starting to show more promise. Its plans to monetize its business are taking form, and it starts with curated Snaps.

Snapchat launched “Rio Live” on the day of the World Cup final, when Snapchat users could send Snaps of their World Cup experience to the Rio Live feed. Snapchat would select the best ones and add it to the “Rio Live” story, which was made available to every Snapchat user on earth.

Earlier this year, Snapchat made its first big deal with EDC, a massive electronic music festival in Las Vegas. Snapchat provided Wi-Fi to the 400,000 attendees and created the “EDC Live” story, where Snapchat users could upload pictures and videos to the feed, available for all to see.

 

 

With these two events in the books, Snapchat’s business model is starting to take form. Although Snapchat may be difficult to value and its CEO may have the maturity of a 24-year old, Snapchat could prove to be a tremendous investment opportunity. With Alibaba’s upcoming IPO, the timing couldn’t be better.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BABA Alibaba Group Holding Limited American Depositary 93.28 0.97 1.05 9,177,566
FB Facebook Inc. 119.68 0.77 0.65 17,464,736
TWTR Twitter Inc. 19.65 0.01 0.05 15,956,083
BCE:CX2 BCE Inc. n/a n/a n/a n/a

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