Just about everyone is writing about the $19BN purchase of WhatsApp by Facebook. Here are several key analyses:
- The price is ~11% of Facebook’s $173.54BN market cap. Since Facebook is not buying it just for current value, Facebook sees WhatsApp as, essentially, equal in value to Facebook in the long-term. This is an enormous risk. Risks like this are usually approved by shareholders, and if they go bad, the CEO is gone. $1BN (<1%) for Instagram was minor compared to this, as was Google’s $1.65BN acquisition of YouTube in 2006 (1.4%). Zuckerberg is betting his career, as is most of the Board.
- The price per current user is ~$42: $19BN purchase price divided by WhatsApp’s 450MM users. Facebook has ~1.3BN monthly users; with its market cap of $173.54BN, that is a valuation of $133/user. Clearly Facebook believes either that it can make each WhatsApp user worth its $133, an increase 3.17X, or that WhatsApp will continue to grow dramatically. As Zuckerberg said, “WhatsApp is on a path to connect one billion people.” However, the cost per user may be significantly higher than $42; what really matters is the cost of new non-Facebook users. It is unclear how many WhatsApp users are not already Facebook users.
- The annual revenue value to WhatsApp of an active user is a clean, clear $0.99, since that is the cost per year (after the first) of the service. Even at a 5x revenue, and assuming 1BN users, the valuation of the company under the current model is $4.95BN. Facebook expects to change WhatsApp’s business model.
- Which begs the question, how will they change it? The fundamental nature of WhatsApp – and the key to its success – has been the famous note WhatsApp founder has on his workspace: “No Ads, No Games, No Gimmicks.” Facebook’s entire business model is built around ads, games and gimmicks. Can Facebook capture the users to higher revenue without losing them?
The CEO (and Board) of Facebook are betting their careers that each current and future non-Facebook user on WhatsApp can be made worth at least the current Facebook valuation, that there are enough of them within WhatsApp’s 450MM, possibly to be 1BN, users to make the current price worth it, that they can change WhatsApp’s business model sufficiently to get that revenue, and that users will not abandon WhatsApp once they do.
This will be an interesting one to watch.