Facebook’s Big Bold Bet: Expensive or Not?

February 21, 2014 Updated: February 24, 2014

New York—Facebook’s $19 billion acquisition of instant messaging service WhatsApp is eerily reminiscent of dot.com era megadeals. Valuation metrics suggest the price tag was hefty, but longer term drivers could make the bet pay off.

An old school valuation metric, the price to sales ratio indicates a company is cheap if it’s selling at less than ones times the company’s yearly revenue. For WhatsApp’s $20 million in sales, that ratio is 950. Earnings data is not available but the company is making money.

Users

Facebook clearly isn’t after immediate sales and profits. It wants the 450 million active monthly users who send billions of text, video, photo, and voice messages every day. So that would make $42 per monthly active user, not factoring in the 1 million new users that join WhatsApp every single day.

This is cheap and expensive at the same time. It’s cheap compared to the current price per user for Facebook itself ($135) and Twitter ($160). It’s expensive however, compared to one of WhatsApp’s competitors, Viber, which has 280 million users and was recently bought by Rakuten Inc. of Japan for $900 million. That’s only $3.21 per user.

One thing is certain. Facebook has a much higher potential to extract money from users than Rakuten, Japan’s largest online retailer.

Synergies

Opportunities for cross selling and synergies abound and give Facebook a lot of strategic options, which usually come at a price. It gives Facebook the option to carefully manage and engage with another segment of the mobile market, which up until recently hasn’t been its forte.

Since WhatsApp can collect pretty much all data on a user’s phone, Facebook can add this pool to its own data collection. It’s hard to slap a price tag on this synergy, but there are numerous ways to make money from customer data.

As a stand-alone app, WhatsApp can add games, stamps, and stickers as well as mobile payments and commerce to make money. Old-fashioned ads are also possible. Citigroup estimates the company could make as much as $1.5 billion to $2 billion from its current users through these channels.

Currency

Lastly, it’s important to consider what currency Facebook is paying in. Sure, the $4 billion of cold hard cash is not a paltry sum.

But the rest comes in Facebook’s own stock. Facebook is just going to issue new shares worth $15 billion (around 8 percent of the current market capitalization) and give them to the WhatsApp owners and employees.

At 22 times 2013 sales and 78 times 2013 earnings, Facebook shares aren’t all that cheap either.

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