Wednesday, February 19, 2014

Did Facebook Get a Good Deal on Whatsapp?

Facebook is set to purchase Whatsapp for $16B in a combination of cash & stock. Sounds like a lot of money for a simple IM app - is it?

Let's look at it from two perspectives:

(1) $Rev / Active User

Whatsapp has over 450M monthly active users (MAU). That works out to about $35 per MAU.

Facebook earned $7.87B across 1.23B MAU. That works out to about $6.49 per MAU. [1]

Which means Facebook paid about 5.5x it's current revenue / MAU for Whatapps's userbase. That's not bad when you consider that acquisitions are generally over 5x the target company's revenue. Even stock prices are often trading at higher multiples.\

(2) % of Market cap

Facebook's valuation comes not only from their earnings but also from their large MAU base. Their ability to increase MAU drives their valuation higher. Facebook is worth about $170B and has 945M mobile MAU.

So they spent just 9% of their market cap on a company that has 47% of their mobile MAU. That's not a bad deal.

Don't forget that Whatsapp users are probably stickier - they probably use Whatsapp more than Facebook Mobile so there's a premium for that as well.

Facebook got a great deal and also showed how much they value their users. They expect to make a lot more money off them when they monetize Whatsapp.

We shouldn't underestimate Facebook's ability to monetize their mobile user base. After all, in a few short years they were able to generate 53% of their total ad revenue from mobile users.

[1] Facebook results for FY2013