Ukrainian entrepreneur Jan Koum stopped by
founder Mark Zuckerberg's house on Valentine's Day with a box of
chocolate-covered strawberries. Koum left with $19 billion
in his pocket after Facebook agreed to buy his startup called
Facebook's acquisition of WhatsApp is the third-largest
Internet deal since Time Warner merged with AOL back in 2001.
The deal is by far the largest acquisition by Facebook, which
bought Instagram for $1 billion
. At the time, that was considered a shocking price tag given
that the popular photo-sharing app was pre-revenue, with no clear
plans to become profitable.
So, What is WhatsApp?
WhatsApp is an Internet messaging service that lets users send
messages to each other through a variety of different platforms
and devices. The app lets users try the service absolutely
free for one year, and then charges a nominal 99 cents per year
for continued access.
WhatsApp isn't exactly unique, and competes with the likes of
WeChat from China's
SnapChat, and Facebook Messenger.
But with 450 million users, WhatsApp has attracted a large and
rapidly growing audience. In just three months, the number of
users has more than doubled.
Not only is the audience large but it's also sticky. Seventy
percent of those users communicate through WhatsApp every
WhatsApp has also become an important platform for
photosharing. There are an estimated 400 million daily photo
shares on WhatsApp, compared with 350 million on Facebook.
Photosharing has been a key aspect of Facebook's social platform,
and the social giant is willing to spend lots of money to protect
its core business.
SnapChat is another big player, with an estimated 350 million
photo shares per day. In November, SnapChat turned down
Facebook's offer of a $3 billion buyout. After that befuddling
rejection, it didn't take Zuckerberg and company long to start
exploring alternative acquisitions.
In the deal announced yesterday, Facebook will acquire
WhatsApp for $19 billion. The acquisition includes $12
billion in stock, $4 billion in cash, and $3 billion in
The steep price tag is an attention-grabber. The deal gives
WhatsApp a valuation equal to 11% of Facebook. Put another way,
it values each of the company's users at $42. That's a 50%
premium to the $28 per user that Facebook paid to acquire
Instagram's 35 million users.
How valuable is WhatsApp? I'll use some pretty
aggressive assumptions to outline the "best case scenario."
Mark Zuckerberg went on the record saying, "[WhatsApp] is on a
path to reach over 1 billion people worldwide in the next few
Based on Zuckerberg's comments and the company's user growth,
I'll estimate that the number of WhatsApp users will grow to 1
billion in the next two years. Meanwhile, I'll assume that 50% of
users are paying $0.99 per year. That translates to $500
million in annual revenue.
The $19 billion buyout price values WhatsApp at 38-times
future sales. That's an astounding valuation, especially
when you consider that
is valued at about 10-times sales and
LinkedIn (Nasdaq: LNKD)
trades at a mere 8-times sales.
don't seem too excited about the deal so far. In trading this
fell by 2% to $66. However, that's just a few points below the
all-time high of $69 for the stock, which was set earlier in the
Back in November, I wrote about
The Latest Sign of a Second Internet Stock
. But the frothy market for social media stocks has continued. In
the last three months,
have soared 35%,
Yelp (Nasdaq: YELP)
is up 43%, and
is up 33%.
I'm worried that Facebook is playing defense, and is willing
to pay any price to stomp out the competition. While that may
work when Facebook uses its overvalued stock to buy the
competition, that's not a sustainable growth strategy.
What do you think of this Facebook acquisition? Feel free to
leave a comment below.
Why did Google just invest $60 million in this
We just found out that some of the savviest investors in the
tech world are bankrolling a new, alternative, web-based banking
platform. Most investors have never heard of it, but we believe
it could revolutionize banking the same way the internet
revolutionized music, communication and business. The best part?
You can invest alongside Google and collect 9.6% yields starting
Click here for the full details.