On February 19, 2014, Facebook (NASDAQ:FB) announced that it was set to acquire mobile messaging application company WhatsApp for $19 billion. The $19 billion purchase price for WhatsApp did include $4 billion in cash, $12 billion worth of Facebook shares, and $3 billion in restricted stock unit grants to be awarded to WhatsApp founders and employees. Facebook and WhatsApp have already claimed that more than 450 million monthly average users access the messaging application. Mark Zuckerberg, of course, first referred to Facebook as a "mobile company," upon the release of his empire's Q4 and full-year 2012 earnings. Facebook has aggressively upped the acquisition ante, after paying $1 billion for Instagram, but also having its $3 billion Snapchat offer rejected at the negotiating table.
Interestingly, BlackBerry (NASDAQ:BBRY) shares have advanced from $9.01 to $10.60 between February 19 and February 25, to register a prompt 17.6% gain in the aftermath of the Facebook - WhatsApp deal. BlackBerry CEO John Chen has recently confirmed that BBM will not be monetized, while numerous analysts have already begun to speculate that this particular messaging application would be in play as an acquisition target. Chen also lauded BBM as a "treasured" and "huge asset." Speculators should take Chen at his word and recognize the idea that BBM is not for sale at the auction block. Bears, of course, would dismiss Chen's recent communications as somewhat Orwellian. John Chen may simply be attempting to rally the BlackBerry employee and shareholder troops, while unwittingly admitting that BBM lacks buying interest.
Brian Acton once wrote a note to his fellow WhatsApp cofounder Jan Koum that read "No ads! No games! No gimmicks!" This original note has remained taped to Koum's office bureau as a directive to maintain a straightforward approach to doing business. To date, WhatsApp has ignored the siren call to plaster its interface with advertisements, while also refusing to spend one red cent upon marketing. As such, WhatsApp has no need to mine data to match up its user base to aggressive advertisers. Ukrainian cofounder Jan Koum grew up behind the Iron Curtain, where advertising campaigns were unheard-of concepts. Government spying, of course, was simply par for the course within the Soviet Union.
WhatsApp philosophies, again, have undergirded a mobile messaging application platform that now carries 450 million monthly active users upon its rolls. WhatsApp may be downloaded and used free of charge for one year. After one year, WhatsApp users pay a mere 99 cents per year to extend their subscriptions. WhatsApp is wildly popular and practical throughout the developing world, where text messaging can be prohibitively expensive across borders due to a lack of telecommunications infrastructure. Text messages through the developing world may cost as much as 50 cents per transmission. According to telecommunications consulting firm Competitive Intelligence Unit, WhatsApp now delivers roughly 90% of all instant messages sent in Mexico. WhatsApp has even stolen share from carriers notable for bundling unlimited text messages within standard data plans. Bloomberg has already credited WhatsApp as the primary culprit behind a $32.5 billion annual drop in aggregate 2013 texting fees.
Be advised that legions of cynical analysts have dismissed the Web 2.0 movement as yet another financial bubble. In Q4 2008, The Federal Reserve Board did lower its target rate to zero, amid a housing bust and credit crisis. The Dow Jones Industrial Average was to consequently advance from 8,7772 to an all-time record at 16,300 between January 1, 2009 and February 24, 2014. In recent times, financial markets have literally been defined by cheap money and expensive stock. Venture capitalist Albert Wenger has already claimed that Facebook "massively overpaid" for WhatsApp. Wenger intimated that Facebook spent its bloated stock to buy into a business model that lacks real barriers to entry. Wenger theorized that Facebook could have built an in-house WhatsApp equivalent for a mere $1 billion. Wenger's analyses do not bode well for the long-term prospects of BlackBerry and its BBM unit. The bubble will ultimately burst.
BBM Is No Youth Movement
On October 10, 2013, Piper Jaffray's 26th semi-annual "Taking Stock with Teens" survey first called attention to the trend of young adults leaving Facebook in droves. 23% of teenage participants within the Piper Jaffray survey identified Facebook as the most important social media destination on the Internet, which was down significantly from the 42% response rate for Fall 2012. "Other," as a response, advanced from 2% to 17% of survey participants through this same timeframe. Certainly, the rapidly expanding Snapchat and Vine file sharing sites made up a large portion of the "Other" category.
Later that October, Facebook's Q3 2013 earnings call was to confirm the fact that teenagers were indeed fleeing the site. More recently, a January report out of research firm iStrategyLabs estimated that 3 million teenagers abandoned Facebook between 2011 and 2014. Facebook users currently enrolled in college apparently also collapsed by roughly 60% during this same three-year time frame. Young adults have begun to shun the ubiquitous Facebook largely due to privacy concerns.
The WhatsApp acquisition, although wildly expensive, may still fill gaps within the Facebook business model. Again, WhatsApp is popular with overseas customers who gravitate towards this relatively cheap messaging application. Perhaps even more importantly, WhatsApp is a major draw for teenagers, who can remain somewhat off the grid and away from extensive data mining. For now young adults may assume that WhatsApp will preserve a measure of autonomy, because Facebook and Instagram still remain minimally integrated, more than one year after this photo sharing buyout deal. Instagram was to triple in size and grow to 150 million monthly active users one year after being acquired by Facebook.
If anything, the Facebook-WhatsApp alliance will bury BlackBerry BBM further down the mobile food chain. An October Verge review dismissed BBM as an application "built for people stuck in the year 2008." The very same Verge review, written by Ellis Hamburger, did cite WhatsApp as the "best solution" for mobile messaging. BlackBerry BBM has remained unwieldy, in terms of adding contacts, because users still require PIN numbers and barcodes to exchange contact information. Alternatively, the WhatsApp application automatically syncs numbers already stored within mobile phone contact lists to begin messaging. The decline in BBM popularity largely parallels the collapse of BlackBerry telecommunications market share. Research firm comScore estimated that BlackBerry clung to a mere 3.4% of U.S. smartphone subscriber market share through the 2013 fall quarter. This performance is a far cry from the 2008 apex of the BlackBerry movement, when the Ontario firm controlled roughly half of the mobile market.
The Bottom Line
Prospective BlackBerry investors should consider the WhatsApp buyout to be somewhat of a one-time deal near the top of an irrationally exuberant Web 2.0 bubble. Technology pundits, of course, should acknowledge the idea that neither of the major mobile players, which would include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG), has made any serious overtures towards any BlackBerry unit. If anything, the real value of BlackBerry BBM may be little more than zero, at best. To date, 85 million users have downloaded the free BBM messaging application for iOS and Android. In any event, Andrew Bocking, BBM Executive Vice President, promptly resigned from BlackBerry, earlier this month. Going forward, BBM will be folded into the global enterprise solutions division at BlackBerry. Again CEO John Chen may have already conceded defeat, in terms of monetizing BBM and preparing it for sale.
BlackBerry closed out its latest Q3 2014 reporting period with $3.2 billion in cash and investments above $4.4 billion in total liabilities on the books. The liabilities side of the BlackBerry ledger did include $699 million in deferred revenue, which will ultimately be recognized upon the income statement. Fairfax Financial, as BlackBerry's most powerful shareholder, has also led a consortium of institutional investors to take down $1.25 billion in convertible bonds at Waterloo. The $1.25 billion investment is convertible into BlackBerry stock at $10 per share, which would add 125 million shares of common stock outstanding to a balance sheet that now carries merely a rough 525 million common shares outstanding. As such, BlackBerry investors may be exposed to massive shareholder dilution, over the course of the next year.
BlackBerry did rack up a massive $5 billion in Q3 2014 operating losses, which did include $2.8 billion in asset write-downs. In recent months, the aforementioned convertible bond cash infusion alongside an ongoing plan to divest real estate holdings have masked the underlying cash burn at BlackBerry. Traders should consider liquidating BlackBerry positions and locking in recent gains, in order to avoid a severe price correction in shares going forward. BlackBerry has nearly doubled off its December 2013 lows to close out the February 26, 2014 session at $10.33 per share. Speculators banking upon a BBM spinoff and fat payday may ultimately be left clutching onto a toxic bag of assets.
Disclosure: I am long AAPL. 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.