Snapchat: Is Yahoo (YHOO) Playing It Safe?

Yahoo (YHOO) and Snapchat soon will be business partners, as the search engine giant is considering pouring $20 million into the three-year-old messaging app that would value SnapChat at nearly $10 billion.

If the story — first reported by The Wall Street Journal — turns out to be true, it will be Yahoo’s second notable investment since the $5 billion windfall it received after cashing out of the Alibaba (BABA) IPO.

snapchat logoSnapchat is a mobile messaging application that allows users to send text, images and video to one another. The messages typically self-destruct in 10 seconds, and their fleeting nature is precisely what has made the app popular.

But before YHOO mulled teaming up with Snapchat, it outright bought another company in the space.

On Friday, Yahoo announced it was buying mobile messaging application MessageMe for an amount rumored to be in the double-digit millions. MessageMe has been compared to WhatsApp, the messaging application Facebook (FB) bought for $19 billion.

Putting the two investments side-by-side makes some of Yahoo’s strategy more apparent: YHOO wants to go mobile with messaging. However, Yahoo’s $20 million investment in Snapchat differs pretty substantially from the FB buyout of WhatsApp.

First of all, YHOO isn’t gobbling up Snapchat whole — it’s only investing $20 million. Secondly, instead of simply buying a wildly successful messaging app and integrating it into its business as Facebook hopes to do, Yahoo is attempting to assemble one from scratch. Bought-out MessageMe certainly will be part of the so-called Yahoo Instant; it remains unclear what part (if any) Snapchat will play.

Having already vowed to return the majority of the cash it raised in the Alibaba IPO to shareholders, Yahoo still has a few billion dollars burning a hole in its pocket after the record-setting IPO last month. Whether that will take the form of a one-time dividend for those owning YHOO stock or whether the company will engage in a massive stock buyback program remains to be seen.

Or, perhaps, Yahoo could continue its two-year acquisition spree.

YHOO gained about 1% against a flat market, so perhaps investors were mildly optimistic about the more cautious approach Yahoo seems to be taking with this latest bit of M&A action. Snapchat, while wildly popular and possibly a fine integration with the company’s aspirations in mobile messaging, is “pre-revenue.” In other words, the company doesn’t have any sales. Yahoo, rather than buying Snapchat and simply hoping to turn it into a money-making machine, instead is taking the safer route, and merely investing in the potential for growth.

But Snapchat’s “pre-revenue” status will change. Snapchat has plans to start featuring news content and showing ads in November, according to The Wall Street Journal.

Until the messaging service can prove that advertisers don’t scare users away from its popular service, Yahoo is probably smart to make a small, calculated bet on Snapchat.

As of this writing, John Divine did not hold a position in any of the aforementioned securities.

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