Unsurprisingly, the sell-side leans negative on the deal, but the Jefferies team says the purchase reminds it of Google's 2006 acquisition of YouTube "where valuation is based on longer-term monetization potential of a disruptive asset." Facebook (FB) remains a Buy at Jefferies with $80 price target.
"To justify $19B, WhatsApp would need to generate around $1B in annual cash flow by our model's terminal year of 2018," says Pivotal Research. "However, few data-points to support such an assumption were provided by the company, as evidently few are available." The team downgrades to Hold from Buy.
Facebook is paying about $42 per WhatsApp user even though said user generates $0.99 per year in revenues, "suggesting a decades-long payback under WhatsApp's current business model, should new user growth slow," writes Evercore's Ken Sena, cutting the stock to Equal Weight with price target lowered $10 to $60. He notes Viber, an alternative to WhatsApp with roughly two-thirds the scale and comparable growth, recently sold to Rakuten for $900M. Sena and team also have separate concerns about engagement in the 18-24 year old demo.
Bernstein's Carlos Kirjner: "[The deal]" suggests limitations on how far the business can be extended beyond facebook.com."
Facebook is off 3.6% premarket