Facebook Inc (FB) isn’t afraid to make an acquisition here or there. If anyone had doubts about that, they should’ve been laid to rest when the social network bought the popular messaging service WhatsApp for $19 billion in 2014.
Wednesday, Facebook confirmed that it had acquired the video filtering app Masquerade, which users may know as MSQRD.
The app allows users to use both photo and video filters, and to do silly things like switch faces with friends, wear a monkey suit, or overlay celebrity faces atop their own.
At first glance, it doesn’t appear the acquisition will have much effect on the FB stock price. That first glance may indeed be correct, but let’s take a look at how it might possibly play into Facebook’s plans anyways.
Then, I’ll propose something that Facebook should consider doing with companies like this in the future. Something, frankly, that would make a lot more sense.
Will FB’s Masquerade Take on Snapchat?
As evidenced by the $19 billion WhatsApp deal, FB really wants to be good at messaging. Its standalone Facebook Messenger service boasts more than 800 million users, while WhatsApp currently tops 1 billion users. Pretty darn impressive.
Still, Facebook doesn’t own every dominant messaging app. The ephemeral video messaging app Snapchat has upward of 100 million daily users, and is catching up to Facebook when it comes to video views; Snapchat now generates more than 6 billion video views per day.
Facebook, which has been building up its video chops to take on Alphabet’s (GOOG, GOOGL) YouTube, most recently said it was getting 8 billion video views per day.
Remember, it’s Facebook’s mission statement to make the world “more open and connected.” So it makes sense that controlling messaging would be a part of FB’s strategy. So why doesn’t Facebook just buy Snapchat instead of some second-rate newbie like MSQRD?
It tried.
Back in 2013, Snapchat CEO Evan Spiegel turned down a $3 billion buyout offer. Sixteen months later it was worth $15 billion. The meteoric rise in valuation caused Slate‘s Will Oremus to apologize to his readers and admit to being wrong; at the time Spiegel turned down the $3 billion, Oremus had written a scathing piece poking fun at the CEO for his arrogance.
Here’s the thing: I don’t really think Oremus was wrong at all. Snapchat was overvalued in 2013 at $3 billion, it was criminally overvalued in 2015 at $15 billion, and even though Fidelity wrote down the value of its Snapchat shares by 25% in November, a valuation north of $10 billion still seems insane.
There’s no telling what FB bought the Snapchat-wannabe MSQRD for, but given its much smaller scale and hype, I doubt it was anything close to $3 billion.
It also remains unclear how the MSQRD acquisition will be integrated into Facebook’s ecosystem, and many possibilities are likely. FB may want to grow the app itself, integrate its technology into Facebook proper to enhance the experience, or use it to lure Snapchat users into using Messenger. Facebook definitely values MSQRD’s trio of founders, so this is partially a talent-grab.
Putting the utility of this recent acquisition aside, I’d like to propose something that Facebook should do in the future, especially given the rapid rise of Snapchat from a $3 billion to a $15 billion company.
Facebook Ventures Needs to Happen
Facebook should copy Google, and establish a “Facebook Ventures” venture capital arm. It’s an open secret that the plethora of “unicorn” companies — private startups with valuations above $1 billion — are wildly overvalued.
Instead of trying to buy all of Snapchat for $3 billion, offer to buy half of it for $1.5 billion, with the intention of flipping it once it goes public, or selling it to an idiotic later-stage investor like Alibaba (BABA), who strutted in and gave it a $15 billion valuation.
Google Ventures has bought pieces of high-profile private companies like Uber, Jet, 23andMe and Nest.
Some back-of-the-napkin math here: If Facebook had successfully acquired half of Snapchat in late 2013 for $1.5 billion, then sold that stake 16 months later for $7.5 billion, it makes a 400%, or $6 billion one-time profit. Imagine what that would’ve done for the value of FB stock!
The company, which trades for 82 times earnings, earned $6.6 billion in fiscal 2014 and 2015 combined. We could seriously be entertaining FB stock at $150 a share if it applied its tech know-how to the world of venture capital, buying up-and-coming startups and selling into the frothy VC-induced private tech bubble.
Instead, I worry that Facebook is subjecting itself to the position of the sucker. Will Facebook ever wring $19 billion out of WhatsApp? Zero chance. Will the acquisition of a poor man’s Snapchat for an undisclosed sum ever financially justify itself? Color me majorly skeptical.
But could Facebook make a pretty penny flipping garbage pre-revenue, buzz-heavy startups to fellow Silicon Valley players with more money and hubris than ol’ King Midas? You bet your bottom dollar it could. Without question.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
