On its face, Facebook (NASDAQ:FB) stock is risky. Facebook stock suffered the largest one-day loss of market value in history last year, after it warned during its second-quarter earnings report that its spending would increase. And FB stock from time to time has been rocked by regulatory pressure and scandals.
Despite all that, however, FB shares continue to rise. The stock now sits just 10% below its all-time highs, reached right before that disappointing Q2 report. One key reason why is the company’s “other” platforms — Instagram and WhatsApp. Both websites continue to post solid growth.
One problem with Facebook stock is that it’s difficult to tell exactly how much growth those businesses are posting and how much profit they are generating, if any. FB doesn’t provide revenue or profit figures for either business; they are instead rolled into the company’s consolidated figures.
In fact, FB doesn’t even disclose user data for either platform, at least on a regular basis. The company’s MD&A (management’s discussion and analysis) section of its 10-K doesn’t mention either business at all. It’s easy to assume that WhatsApp and Instagram are valuable. But performing traditional fundamental analysis of those platforms is close to impossible.
Still, investors can at least get an idea of what each business is worth. And based on what we can surmise, the valuations of both businesses suggest further gains by Facebook stock.
Last year, Bloomberg estimated that Instagram was worth more than $100 billion. That analysis came soon after FB disclosed that the image-sharing platform had cleared 1 billion monthly users; Bloomberg forecast that Instagram would hit the 2 billion mark in five years.
It’s impossible to double-check Bloomberg’s proprietary work, but the figure seems potentially reasonable. Another analyst estimated last year that Instagram generated 15% of the company’s revenue. Assuming that figure has ticked up in 2019, based on Facebook’s projected $70 billion in revenue, Instagram likely will generate revenue in the range of $12 billion this year.
Snap (NYSE:SNAP) trades at a whopping 12 times analysts’ average 2019 revenue estimate. A similar multiple for Instagram would suggest a valuation close to $150 billion. And an investor could argue that Instagram – which is much larger and may be growing as fast, if not faster – merits a premium to Snapchat. Suddenly, $200 billion doesn’t seem like an absurd figure. (That’s particularly amazing given that Facebook CEO Mark Zuckerberg picked up Instagram for $1 billion,a price that many then thought was far too high.)
Looking at users, a $100+ billion figure seems valid as well. Instagram has over 1 billion monthly active users; Snap has under 200 million daily actives. Snap disclosed last year that its North America monthly figure was over 100 million, against 71 million DAUs (daily active users). Assuming the same proportion still holds, Snap probably has about 300 million monthly users , and Instagram likely has four times as many.
That would suggest Instagram is worth at least $75 billion (four times Snap Inc’s current enterprise value). But Instagram is a better platform and has a better sales force behind it, and thus gets more value out of its users. Based on those criteria, $100 billion-plus amazingly seems reasonable.
Figuring out the valuation of WhatsApp is a bit more difficult. But the number could be similarly large.
After all, Facebook paid $19 billion for WhatsApp back in 2014. At the time, WhatsApp had 450 million users. Three years later, that number has more than tripled: the company disclosed early last year that the messaging platform had over 1.5 billion MAUs.
To be sure, that doesn’t necessarily mean that WhatsApp’s valuation has tripled. Facebook’s price was criticized by many as too high. We don’t know to what extent Facebook actually makes money from WhatsApp.
But other valuations suggest FB has done well on this acquisition, too, even though WhatApp’s returns haven’t been as high as those of Instagram. Twitter (NYSE:TWTR) finished 2018 with 321 million MAUs (it’s since stopped disclosing the figure). Its enterprise value is $25 billion; a similar value per user for WhatsApp would put the platform’s valuation at $125 billion.
China’s WeChat, owned by Tencent (OTCMKTS:TCEHY), had valuations of $60 billion and $84 billion earlier this decade. WhatsApp has a larger user base, although its importance to those users (and its usage) likely isn’t as great as that of WeChat. Still, a $100 billion valuation for WeChat isn’t out of line and WhatsApp, with similar dominance in the rest of the world and a larger user base, could be worth a similar amount.
What This Means for FB Stock
The owners of Facebook stock aren’t getting the legacy business for free or close to it. FB at the moment has a market capitalization of about $550 billion.
But Instagram and WhatsApp, plus the company’s cash, make up a decent amount of that figure. FB closed the first quarter with $45 billion of cash and investments. Assuming valuations of $125 billion for Instagram and $100 billion for WhatsApp, the “other” platforms plus cash are worth basically half of the company’s market cap.
In other words, the Facebook platform is valued in the range of $280 billion, yet the company should generate net income of roughly $20 billion this year. An investor could argue that FB “actually” trades at something like 14 times its earnings, but that’s not quite the case.
After all, Instagram and WhatsApp may contribute some portion of that $20 billion. That said, the broader point still holds. The legacy business is driving most of that $20 billion of profit, which still suggests that investors are valuing the platform at a modest earnings multiple, likely something in the 16-18 times range at the highs of FB stock.
Is that a good deal? Perhaps. There’s a risk that the namesake business will slow down. Some of Instagram’s usage, for instance, is coming from users who have left Facebook or aren’t using it as much. Privacy concerns remain an issue.
But the non-Facebook platforms also create some downside protection for Facebook stock. If users leave Facebook, they’re likely not leaving social media; rather, they’re probably going to Instagram. And neither Instagram nor WhatsApp seems to have the branding problem often cited by those who are bearish on FB stock.
With Facebook’s user base remaining intact, and the company still competing effectively for advertising dollars with Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), the Facebook platform hasn’t lost its magic yet. That, plus the value of the company’s ancillary businesses, keeps FB stock attractive at the highs. But even if Facebook stumbles, investors at least can take comfort that even the worst-case scenario might not be that bad.
As of this writing, Vince Martin has no positions in any securities mentioned.