For Yahoo, Snapchat will not be the next Alibaba

October 6, 2014, 6:55 PM UTC
Illustration: Fortune

After the WSJ reported last Friday that Yahoo (YHOO) is in talks to invest in messaging company Snapchat, I pointed out that the deal would contradict a senior Yahoo’s recent statements about how corporate venture capital investing is a distracting “hobby.”

A few readers emailed to suggest I missed the boat, mostly echoing the succinct Ryan: “Yahoo is able to invest in Snapchat because of the money it made from its earlier investment in Alibaba. It probably views this as its next Alibaba.”

No, it doesn’t. Because it can’t.

To be clear, I’m not saying this as an indictment of Snapchat. I’m saying it as someone who passed fourth-grade math.

Yahoo’s original $1 billion investment in Alibaba (BABA) is currently valued at around $51.1 billion, if you include three things: (1) The 2012 share buyback, which included $6.3 billion in cash; (2) The IPO, which generated around $9.4 billion for Alibaba; and (3) Yahoo’s remaining stock holdings in Alibaba, which are valued at around $35.4 billion. Or, put another way, a return of around 51x.

Yahoo’s reported deal for Snapchat would be an investment of around $20 million at a $10 billion valuation. To get the same multiple, Snapchat would need to be valued at around $501 billion. For context, that would make it the second-largest company traded on a U.S. exchange, behind only Apple (AAPL) . It would be more than $100 billion larger than current second-place company Exxon Mobil, and not to mention such companies as Microsoft (MSFT) , Johnson & Johnson (JNJ) , Wells Fargo (WFC), General Electric (GE) and Wal-Mart (WMT) . Not to mention Alibaba, which only is valued at around $216 billion.

But even if Snapchat — a company that so far has yet to generate revenue — somehow becomes an Apple-like outlier, Yahoo still would not get the same bang because it’s putting in fewer bucks. Were Snapchat to hit the 51x mark, its investment would be worth just over $1 billion. That’s a phenomenal return on relatively little risk, but wouldn’t give future Yahoo anywhere near the financial flexibility that current Yahoo received from Alibaba.

Yahoo’s anticipated investment in Snapchat raises a lot of questions. But one certain answer is that it will not be Alibaba, The Sequel.

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