The purchase of Whatsapp by Facebook over the last week-end raised some eyebrows. Why paying $17 Billions (up to $19 Billions given possible future payments) for a simple smartphone app with relatively little revenues, or about $50 Millions from people that pay $1/year to access the platform, apparently on a ‘volunteer’ basis. $19 Billions is a multiple of about 380 times its revenues. For reference, the highest priced companies in the stock market do not exceed a multiple of 30-40 times revenues. There are other things Facebook could have bought with that money. Could it?
With 450 Millions users, Whatsapp is well on its way to reach a Billion users. Its engagement rate (how many people check in the platform at what frequency) is higher than Facebook’s. Out of the Million of apps out there, it’s a super star, no question about that.
On the other hand, the deal was almost an all share purchases, with ‘only’ $4 billions in cash. Whatsapp shareholders received Facebook shares. As such, it makes more sense to compare the value of Whatsapp not in absolute terms but compared to the value of Facebook itself. With about 1.2 Billions users and a market cap of around USD 120 Billions, every Facebook user is worth about $100. This is the total value a user brings over its lifetime to the company – mostly from advertising dollars, and some direct revenues through app purchases, minus what it costs to keep him engaged. Now, how much is a Whatsapp user worth? Assuming the 1 billion mark is a matter of months or a year, they are worth only $17 per user, or about 6 times less (about 3 times less if you simply compare with today’s user base).
Now of course the longer term question for Facebook shareholders is: can we extract more than $17 per user of Whatsapp in order to recoup the acquisition cost? Well, if you are a Facebook shareholder you actually hold a stock that basically says a user is worth $100, so you are kind of convinced (granted, many users are actually the same, so the question is ‘Can we make a user worth $117, across Facebook, Whatsapp & Instagram?’). The next question is then: but how can you raise the monetization of the huge user base without scaring users off and have them flee ‘en masse’ to the new fashionable app? Let’s make a guess: Mark Zuckerberg does not care too much about that, he simply wants to remain the king of social media. And he is right: there is a huge premium for the #1 platform that advertisers will be willing to pay over time, since they can better focus their dollars. In addition, there is the temptation to extend the ‘user pay’ model of $1/year (or more) to Facebook, as people increasingly complaint about the quantity of advertising on the platform. So it’s not about making lots of money on Whatsapp, it’s about being the #1 and, maybe, get Facebook into new territories.
At the end of the day, the price of Whatsapp was indeed a bargain to Facebook, but only to Facebook. The assessment might be different in a few years from now, depending on the choices Facebook makes before the app goes out of fashion, if it does one day.
In the meantime, let’s check out some of those new social apps out there.
