$19 Billion for WhatsApp: Did FB Get a Bargain?

When Facebook’s (FB) Mark Zuckerberg negotiated the $1 billion deal for Instagram a couple years ago, he took about three days to pull it off.

whatsappZuck must be getting old. His $19 billion purchase of mobile messaging service WhatsApp took a whopping 11.

If the valuation seems off the charts, you’re not alone in thinking it. But when it comes to dominating the mobile world, a CEO needs to act quickly … and sometimes, pay up big-time.

Zuckerberg has no problem with any of that.

But does the deal make sense? Will it drive FB stock? Don’t hold your breath, because it’ll probably take a few years for those answers to develop. But given Facebook’s size, the company had no choice — it has to make mega deals to maintain its healthy growth rate. As Twitter (TWTR) has proven of late, deceleration leads to severe consequences on Wall Street.

And while the world certainly gave Facebook a tongue-lashing last night, investor reaction isn’t too harsh — FB stock is only down roughly 2% in Thursday’s trading.

WhatsApp: What’s in It for Facebook?

When it comes to user growth, WhatsApp certainly has a place in the big leagues. During its first five years, it has outperformed Google’s (GOOG) Gmail, Twitter, Microsoft’s (MSFT) Skype and even Facebook.

Consider that WhatsApp is getting about 1 million signups a day. In contrast, Twitter got just 9 million for the entire fourth quarter. And with the support of Facebook and increased visibility from the mega-deal, this growth is likely to accelerate … but even without a ramp-up, WhatsApp is on track to reach 1 billion users within the next couple years.

If so, WhatsApp would be one of the world’s top mobile brands … and somehow turn a $19 billion price tag into a screaming bargain.

Not to mention, a nice driver for FB stock.

You see, WhatsApp isn’t just large — it’s engaging; 72% of its user base launches the app every day. (Anything over 20% is considered good across the social spectrum, and Facebook, for what it’s worth, sits around 62% daily.) The benefit of this? If users are engaged, it’s pretty easy to get them to pay money to keep using the app.

The app also could introduce add-ons such as stickers, virtual items and even e-commerce — things that have proven quite popular in various markets, such as Asia. And, over time, the average user might be willing to spend more than the current annual $1 fee, which would ring up a lot of revenues across a 1 billion-plus user base.

And those are revenues coupled with crazy margins. Keep in mind that the headcount of WhatsApp is a meager 55 people, and the company spends literally nothing on marketing.

Potential Issues

This isn’t to imply that the WhatsApp deal will be a slam dunk, or an elixir for FB stock. After all, WhatsApp has a completely opposite approach to Facebook. The service has no advertising, nor does it collect personal information. All it relies on is a 99-cent yearly fee that only takes effect after the first year of usage. WhatsApp CEO and co-founder Jan Koum even has the following note on his desk: “No Ads! No Games! No Gimmicks!”

Facebook, on the other hand, gets much of its money from advertising and has a huge trove of user information.

Whenever you have this kind of dissonance with strategic approaches, a merger can result in heavy friction, which of course would bode poorly for FB. But, Zuckerberg has pledged that he will allow WhatsApp to remain independent, saying on the conference call, “I don’t personally think ads are the right way to monetize messaging systems.”

Something else to consider: WhatsApp could have problems keeping up the user growth. True, the app has been successful in markets like Europe, India and Latin America. But a key reason is that these countries have carriers that charge exorbitant SMS fees. However, in the U.S. market, Facebook’s own Messenger service is a big player, and SnapChat also might be gaining ground (explaining Zuckerberg’s $3 billion offer for the company).

And the rest of Asia could be a tough market to crack. There are already entrenched players like WeChat in China, Line in Japan, KakaoTalk in South Korea and Viber in the Middle East. Unseating these players will not be easy … or worse, they could become competitive threats in the U.S. and Europe.

Bottom Line

Despite all this, I like Facebook’s deal for WhatsApp. Zuckerberg has shown that he is serious about winning mobile, and he just made a bet on the fastest-growing property in the space.

So if WhatsApp does become the global standout it looks like it can be, the monetization should come in time, which will boost FB stock for the long haul.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2014/02/facebook-fb-whatsapp-bargain/.

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