Lot has been talked about Facebook and WhatsApp deal. The deal size created lot of news even in mainstream media. but there are few important point we need to discuss if we are planning to invest in Facebook (FB) at current price.
Facebook Currently trading at $61, down 15% from its 52W high and market cap at $155Billions. Facebook has emerged as major player in online ad market. The size of this market currently around $150B and it is poised to grow at reasonable rate in near future.
Google(GOOG), Twitter and Linkedin are other players in the same space. There is major difference in way we use Google and Facebook. Google is mainly used for services like search, map etc. Google is successful in monetizing their services. Google has some core expertise which make their position unique in this space.
In Google's comparison, Facebook is doesn't have major technological advantage over its smaller rival.
Facebook in recent times has done some major acquisition like Instagram, WhatsApp and Oculus. As compared to Instagram and Oculus acquisition WhatsApp acquisition is big and has big impact on companies financial like cash outflows, equity dilution etc.
The reason of this acquisition are mainly to defend it from growing threat from mobile messaging app, lack of killer Facebook app in the same space and justifying it's very high valuation with user base and future growth. I will explain the reason in details.
Growing threat from mobile messaging apps
WhatsApp, Line, Wechat and Viber are currently major players in mobile messaging apps. Mobile messaging apps are extensively used on mobile platform to send test,image,video messages.
With WhatsApp acquisition now the leader is in Facebook camp. but still there is significant competition from other apps like Wechat and Line. They also have very strong group backing. These apps are popular in Asia where monetization will not be easy as in US,Europe. There are emerging players like Snapchat which will further heat up the competition. This is very dynamic market. One simple idea can make big impact here and can change all equations in this space.
Lack of Killer messaging app from Facebook
Facebook has its own messenger for mobile platform. It also has similar features and hundred of million download ( may not have that many active user of course).I am sure most of the user base is same between Facebook and WhatsApp. They will use it for same purpose like sending text message, sharing photos and so on.Whatsapp doesn't give any technological advantage to Facebook's core expertise . Whatsapp is current leader but it has to keep it innovating to maintain its lead over other peers. Even other messaging apps are free right now so monetization of this service will be very difficult beyond certain point.
Justifying high valuation and future growth
Facebook and WhatsApp serve the market where all products are short-lived and they need constant innovation and feature addition to maintain active user base. These are just application and switching to other app for small feature is very common. There is constant threat from Google in the form of google+. Here in India I have seen people moving from Orkut to Facbook and then to Whatsapp in short span of 10 years.These are social platforms,they are either crowded space or ghost town.
In future as well Facebook always has two options. Either to keep innovating at fast pace to keep lead over rivals or keep acquiring the leader to defend it's position.First option is always very difficult and very few companies can achieve such success. Other option is always not feasible.
My reccomandation for long term investor is to switch to Google from Facebook if you believe in online ad spend.For Facebook, joyride is already over and may have bumpy road ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.