As rumors of Google (NASDAQ:GOOG) considering buying WhatsApp for approximately 1 billion dollars continue propagating, we analyze the possible consequences of such an acquisition for the Internet giant. In what follows, we assume that the size of the deal is approximately 1 billion dollars.
1) The Real Value of WhatsApp
In order to know if Google is paying an excessive premium, we need to have an approximate idea of WhatsApp valuation. Unfortunately, there is little public information available on the topic. WhatsApp executives have been cleverly secretive about its statistics. It only informs about milestones:
- November, 2011: 1 billion messages a day, approximately 11,574 messages per second.
- August, 2012: 10 billion messages a day, approximately 115 740 messages per second.
We can only obtain a vague approximation of what WhatsApp is worth from these milestones.
One way of doing this (the "Forbes" way) is as follows: assume that an active user sends, average, 50 messages per day. That would give 80 million DAUs. 30 messages/day would give 133 million DAUS. 15 messages per day would give 270 million DAUs. Most likely, WhatsApp real DAU power would fall somewhere between the two extremes: about 120-150 million DAUs. Considering Skype has 254 million MAUs and it was worth $8.5 billion to Microsoft (NASDAQ:MSFT), and that Instagram had about 50 million users when it was worth approximately 730 million to Facebook (NASDAQ:FB), a 1 billion valuation for WhatAapp seems quite realistic.
There is another way, the revenue way (or "Quora way", see why here). I know that revenue is not value but since there is nothing orthodox about the methods we are employing in this article (because, in the first place there are no 10Ks!) we might as well try it.
Unlike Instagram, WhatsApp has revenue. It must have! After all, its system handle approximately 2 million TCP connections!
Now, since WhatsApp does not use advertisement, the only source of revenue comes from the $0.99 one-off fee on iOS and the $0.99 year fee on other platforms. Assume that WhatsApp users are spread proportionally across different mobile OS platforms, under the 2011-2012 proportions:
Now assume that WhatsApp has 100 million active users, a moderate assumption. Since the average revenue split on the iTunes Store is 70/30 and considering an additional initial revenue from iOS ($18 million), you obtain an approximate of $45 million annual revenue. If the average salary for the 35 staff members is $150,000 per year and assuming $900,000 dollars in monthly infrastructure (servers) costs, you have a rough variable cost of $15 million per year and an after tax profit over $20 million. Taking the 32 multiple that Microsoft agreed to pay for Skype's operating profits, this is a valuation of at least $640 million, not far from the $1 billion.
We conclude that a $1 billion deal for WhatsApp would be fair. Google will be paying a decent premium, if we consider what Google paid for Skype or, even worse, Facebook, for Instagram.
2) The consequences
- At this moment, it is hard to predict how the markets would react. However, we should keep in present that a $1 billion valuation for WhatsApp is realistic. Naturally, the smaller the premium, the higher the chances for Google to create value out of this deal.
- Synergies: Google could integrate WhatsApp to Google+ and Google Talk.
- Knowledge: By integrating WhatsApp to Google +, Google will have access to the mobile numbers of more than a 100 million users worldwide. Information is everything!
- Immediate access to well-established markets share and product experience.
- Increase competitiveness against Microsoft (Skype), Yahoo, Facebook (Facebook Messages), Viber and Line.
- Talent acquisition.
- Monetization is hard.
- If Whatsapp is really making $20 million in after tax profit per year, it would take 50 years (assuming no inflation) to recover the premium.
- Although WhatsApp is a leader in the field, there are many strong competitors. Furthermore, some of them have experienced impressive growth. LINE reached 100 million users worldwide in less than 2 years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.