Google Should Buy WhatsApp

| About: Alphabet Inc. (GOOG)

With all the talk about Facebook (NASDAQ:FB) launching Home to take over a Google (NASDAQ:GOOG) Android phone, now is the perfect time for Google to step in and acquire WhatsApp. There was talk back in December of this happening and it didn't. According to Digital Trends, talks have been going on and that WhatsApp rebuffed a $1 billion deal. WhatsApp has denied that talks are ongoing. I think an acquisition of WhatsApp makes sense for Google and they need to make every effort to get a deal done.

What is WhatsApp?

WhatsApp is one of the most popular messaging applications on mobile devices. It can be used on any platform including Android, iOS, BlackBerry (NASDAQ:BBRY) and Windows phones. Users can send instant messages along with images, audio and video. There are no SMS fees involved. WhatsApp charges 99 cents for the app and is the number 2 paid app on iOS. The service has become quite popular among the teen generation who are usually the first adopters to new technologies.

It is estimated that WhatsApp has more than 300 million users. This past New Year's Eve, 18 billion messages were processed via the app. The most popular aspect of the service is its group chat feature. Google could work to incorporate this feature with its Google Hangout service on Google+.

Why This Time WhatsApp May Want To Do A Deal

WhatsApp is facing increasing competition in Asia from new chat services. In Asia there's been the rise of WeChat in China, KakaoTalk in South Korea, and Line in Japan. All are growing rapidly with WeChat having around 300-400 million users, Line at 120 million users, and Kakaotalk at about 82 million users.

As these services continue to grow, WhatsApp is going to require deeper pockets and more cash to not cede further ground to these rising apps. There are numerous opportunities in the space for social gaming and location-based add-ons.

Why This Time Google May Want To Do A Deal

Two words - Facebook Home. Google risks Facebook taking over its Android interface with its Home app. Google needs to do something to take the momentum away from Facebook in the mobile messaging space. Plus the ability to incorporate the popular WhatsApp chat application with its Google+ could really drive growth. Even though there are several aspects of Google+ that I like better than Facebook, Google+ just hasn't caught on like Facebook. The main users of Google+ have been businesses and anyone looking for an SEO presence to curry favor with the Google search bots.

An acquisition of WhatsApp would further help Google in its war with Apple (NASDAQ:AAPL). Apple runs the risk of its iMessage and Facetime getting left behind because of their closed platform. Users can only interact with other users on the iOS platform. WhatsApp interacts with all platforms and would further help Google gain over Apple.

Facebook Realizes Messaging Apps Pose A Huge Threat

Facebook's Home is not only a strike against Google, but a strike against the growing chat messaging services. The chat apps strike at the heart of what Facebook is all about - sharing info among users. The chats are mobile based and provide the user a seamless way to do this and do it in a more private way.

In Asia the chat apps are growing so fast because they allow group chats and are more private than Facebook. The sharing is person to person or within certain groups. Messaging and photo sharing are at the very heart of what made Facebook so popular in the first place. These new companies are encroaching on the very fabric of what Facebook was built on.

Why A Deal Might Not Get Done

$1 billion is a lot of money to pay for a service that charges 99 cents and has no advertising model. You will never get barraged with ads on WhatsApp like you will with Facebook. Advertising is also at the very heart of what made Google such a rich company. The last $1 billion acquisition in the social media space was Facebook's acquisition of Instagram. Facebook has yet to monetize Instagram in a meaningful way besides incorporating it into Facebook. Many analysts feel that Facebook overpaid for Instagram.

$1 Billion Is A Drop In The Bucket For Google

Google has over $48 billion in cash on hand. $1 billion would just come out of petty cash and I think Google CEO Sergey Brin would be happy to drop $1 billion just to give Facebook CEO Mark Zuckerberg a bad day.

But besides that, Google really does need to tie up its disparate attempts at messaging. When I mention Google+ within that service is Google Talk, Google Voice and Google Hangouts. None of these services are as popular as WhatsApp on mobile devices. An acquisition of WhatsApp would give Google a clearer strategy to tie its services together.

Ultimately both Google and Facebook realize that the war to be won is in the mobile space. Users are switching from desktops to tablets and mobile devices. The company that can best offer the user the most services that they want without a barrage of ads will win the war. I think an acquisition of WhatsApp by Google would give Google the lead and that's why I think the acquisition makes sense.

Outlook For Google Stock

Google's stock has had an impressive run and I think it will continue higher. This year will see the introduction of Google Glass for the holiday season and that will give the company first-mover advantage in the mobile eyewear space. Microsoft (NASDAQ:MSFT), Apple, BlackBerry, Samsung (OTC:SSNLF) and Sony (NYSE:SNE) are all rumored to be developing their own glass product. All these companies see the glass market as the next big market after the mobile handset and smart phone device category.

Google's YouTube continues to make impressive gains on its mobile platform. Each day YouTube mobile is viewed 1 billion times. YouTube mobile is now on over 400 million devices and continues to grow. Since 2011, growth in mobile has tripled.

From a valuation standpoint, the forward P/E is only 14.77. The company boasts an operating margin of 26.68%. Google has $48.09 billion in cash on the balance sheet, or $145.87 per share. Of the analysts that follow the stock, 11 have it rated as a Strong Buy, 15 a Buy, and 12 a Hold. Targets for the stock range from $740 to $1000 with $860 being the median target.

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.