Alibaba: Snapchat Investment Addresses A Mobile Weakness
Mar. 13, 2015 3:02 AM ET
WestEnd511 - Seeking Alpha
BABA's investment in Snapchat addresses its weak presence in mobile messenger.
Mobile messenger directly relates to BABA's m-pay, m-commerce and m-ad initiatives.
BABA should acquire Snapchat in the long-run at 100x EV/MAU.
Alibaba (NYSE:BABA) made a $200m investment in Snapchat that values the messenger startup at $15b, implying a 1.3% equity stake by BABA. While the stake appears to be passive, I believe that BABA could potentially expand its stake in the messenger platform to broaden its presence in mobile. Over the past five years, it is evident that BABA is falling behind the mobile messenger trend that has benefited rival Tencent's WeChat and NAVER's LINE messenger in Asia.
In North America, Facebook's (NASDAQ:FB) Whatsapp and FB Messenger as well as the Canadian start-up Kik have dominated communication over mobile messenger apps. Clearly, BABA's presence is diminishing among mobile apps, which has been winning mobile engagement at the expense of microblogs as we have witnessed in Weibo's (NASDAQ:WB) result. The lack of meaningful presence in mobile messengers will particularly impact BABA's business in mobile payment, mobile ad, mobile ecommerce and mobile commerce (ie. location-based services). As such, BABA needs to build a strong mobile messenger presence to counter ongoing rise of Tencent's WeChat, Whatsapp, and FB Messenger.
Better late than never
BABA's passive stake in Snapchat addresses its lack of presence in mobile messengers. As I mentioned earlier, while BABA dominates China's ecommerce market and currently the mobile payment with YuE'Bao mobile wallet, this competitive advantage is unsustainable in my view as engagement shifts towards mobile messenger apps. Higher engagement could lead to higher utilization of derivative service such as mobile payment, social networking, o2o booking and mobile banking. In the long-term, mobile messenger could even incorporate an even more robust mobile commerce platform that we have today with LBS push-notification and O2O functions. In short, mobile messenger could be the center stage for most of our mobile activities and BABA's ecommerce, mobile ad and mobile payment platform depends on this move.
BABA certainly understands this concept. In addition to Snapchat, BABA also invested in Tango, a mobile messaging and calling app that has 250m registered users. In my view, Tango's current user growth may be stagnating and that BABA is in need of a more globally focused mobile messenger that has stickiness and reach. Snapchat fits this profile and could be accretive to BABA's long-term vision of driving the global ecommerce and mcommerce platform.
Will BABA buy Snapchat?
I believe so. With close to 200m monthly active users and valuation of $15b, Snapchat is valued at 75x EV/MAU which compares favorably to that of FB's 150x EV/MAU and Twitter's (NYSE:TWTR) 100x EV/MAU. When looking at the Asian comps, Tencent is trading at 200x EV/MAU and NAVER is trading at 110x EV/MAU. Under a takeout scenario, BABA will be paying 100x EV/MAU based on the blended of Snapchat comps, implying a total EV of $20b, which is similar to that of what FB paid for Whatsapp.
Conclusion
BABA's passive stake is a good start in building its mobile messenger presence and remains my top pick among the Chinese internet names.
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