Alibaba Group Holding Ltd (NYSE:BABA) just announced it is investing $200 million in smartphone app Snapchat. If you’re unfamiliar, Snapchat sends photos to other users, then those photos disappear after a set time and are deleted from Snapchat servers.
BABA stock investors seemed to be pleased by the move, as shares are trending modestly higher today. The Chinese e-commerce giant is looking to build up a mobile presence, so this fits in line with what some on Wall Street want.
Too bad the Alibaba investment in SnapChat is just another dumb tech boondoggle, and the latest sign we are at risk of a new tech bubble as startup valuations get to be ever-more ridiculous.
To be clear, I’m not saying the investment won’t pay off. BABA stock could benefit from its position in Snapchat simply by virtue of the Silicon Valley feeding frenzy these days. Considering that Alibaba’s investment in Snapchat values the company at around $15 billion, the 4-year-old app maker is clearly one of the most in-demand startups out there.
If execs can trade out of this newly initiated Snapchat position before the bottom falls out, it could ultimately benefit BABA stock via a nice payday.
But don’t hold your breath.
Silicon Valley is rife with money-losing startups, and even companies like Snapchat that barely make any revenue yet. You can argue that the best time to get in on a company like this is when it’s in the early stages, but does anyone think Snapchat will grow tenfold from here — to, say, a $150 billion valuation? That would make it one of the 50 largest U.S. corporations, on par with Intel Corporation (NASDAQ:INTC) and Citigroup Inc (NYSE:C).
That is never going to happen.
Never ever ever.
Never.
It’s possible that Alibaba can find a greater fool to sell its stake to for a handsome profit. It’s also possible that a direct investment will give management a privileged look into Snapchat that will result in Alibaba initiatives that eventually benefit BABA stock.
But to me, this is $200 million flushed down the drain.
BABA Stock Is in Deep Trouble
The cynic in me wonders if this is just an effort to distract investors. Ever since hitting a high of $119 after its IPO, BABA stock has been steadily losing ground — and for good reason.
For starters, there’s the glut of about 430 million shares — or about 18% of the company — that will flood the market in March as the first lock-up expiration ends and insiders bail out in droves.
What’s worse, it’s only prelude to a larger lock-up that expires in September that unleashes 1.58 billion ordinary shares!
Clearly nobody wants to be left holding the bag amid all this dilution. But even worse is that beyond the market mechanics, the basic fundamentals are looking troublesome, too. In January, Alibaba reported revenue that missed expectations, and old concerns about monetizing mobile users cropped up again.
Sure, BABA stock trades for a forward price-to-earnings ratio of about 29 — seemingly cheap after its sky-high valuation late last year. But price-to-sales ratios are still off the chart as Alibaba trades at 18 times sales vs. about 2 for Amazon.com, Inc. (NASDAQ:AMZN) and 4 for eBay Inc. (NASDAQ:EBAY).
Don’t even think of bargain hunting in this internet stock. Momentum remains firmly to the downside, even after this ridiculous Snapchat investment has given BABA stock a short-term lift.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
