Facebook (NASDAQ:FB) announced that it will acquire mobile messaging app WhatsApp for a whopping $16 billion, out of which $12 billion will be funded through stock and the remainder through cash. The deal also includes another $3 billion in restricted stock units. The price tag clearly underlines the value that the company sees in WhatsApp, and we believe that this perceived value is mainly centered around the incredible subscriber growth that the app has seen since its inception. WhatsApp currently has 450 million monthly active users with more than 70% of them accessing the service every day. In addition, the service is gaining more than 1 million members daily and its messaging volume is approaching the global SMS volume. These statistics are jaw dropping, and at some level may even appear to justify Facebook’s proposal. However, stacking valuation per user in tandem with revenue per user for WhatsApp against that for Facebook and Twitter (NYSE:TWTR) reveals how expensive this deal is.
Our current price estimate for the company stands at $45, implying a discount of about 30-35% to the market price.
The Acquisition Is Certainly An Expensive One
At $19 billion (including RSUs), Facebook paid a price of $42 per user for WhatsApp. Going by the market valuations for Facebook and Twitter, and the number of average monthly users for Q4 2013, we conclude that the corresponding figures for these companies stand at $141 and $124 respectively. Going by this, the price for WhatsApp doesn’t appear to be too expensive. However, this is just one side of the story. The difference in price per user stems from the fact that Facebook is doing incredibly well financially, and Twitter has shown strong growth in its revenues and EBITDA (earnings before interest, taxes, depreciation and amortization). Both these companies have their monetization model figured out on desktop and mobile. WhatsApp’s revenues are still low in the context of its user base, and its expenses remain unknown. Let’s compare revenue per user for these three companies.
Given that WhatsApp charges $1 per year per user and the first year is free, its average annual revenue per user will be less than $1. In comparison, the figure for Twitter stands at $3 and that for Facebook stands at $6.73. Considering this information, the price for WhatsApp seems more expensive than Twitter’s current market valuation, and way higher than Facebook’s. To explain this better, we take the following example. If WhatsApp was to earn thrice as much revenues as it is currently earning, its average revenue per user will still be below $3 (the figure for Twitter is $3 as we previously mentioned), and purchase price per user will shoot past $126. In other words, taking revenues, user base and market valuations into account, WhatsApp’s acquisition price seems very expensive. It is a big bet that Facebook has placed.
What May Be The Motive Behind Paying Such Expensive Price?
It appears that Facebook is buying out a potential competitor and in the process, rectifying its failure in the mobile messaging market. The company’s Facebook Messenger service didn’t garner much attention and WhatsApp, by far, is one of the most popular and fastest growing messaging apps in the world. In addition, there are young users who use WhatsApp but not Facebook. This offers the company an opportunity to further consolidate its position globally and monetize this untapped user base. We also believe that mobile messaging is here to stay, even though the growth in social networking industry might slow down. This is because mobile messaging enables a very basic human need — the desire to communicate with friends day to day in a convenient manner. In some ways, Facebook may have acknowledged a weakness in its business as it looks into the future, and is attempting to plug that gap with WhatsApp’s acquisition.
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