Sunday, February 23

Is WhatsApp valuation of $19 billion justified?

Facebook's recent announcement of the USD 19 billion acquisition of WhatsApp has stirred the social network and finance fraternity.

Surprisingly, many financial analysts have been justifying the valuation calling it Facebook's (more specifically, Mark Zuckerberg's) move towards achieving the objective of "connecting the world".

Here's a quick peek at how the valuation plays out.

WhatsApp's model
WhatsApp has been a huge success in terms of user engagement and its its average 450 million active users are usually very active on the application sending millions of text messages and photos (even videos). Recently, WhatsApp also added the voice messaging system on its application.

From Revenue perspective, WhatsApp is free for 1st year of service and then charges $1 per annum. However, the system can be bypassed easily and there are millions of users who have never paid despite using the application for years. This is a major snag in WhatsApp's revenue generating capacity. WhatsApp has strong presence out US in Europe, Latin America and India.


Revenues per user
With 450 million users and even if we assume that every use pays a dollar for service, the current revenue would pan out to USD 450 million per annum.
Facebook's valuation of WhatsApp turns out to $42.22 per WhatsApp user. [Facebook's recent acquisition of Instagram for $1 billion valued each Instagram user at $30]. For the record, approximately, Facebook trades at $123 per user and Twitter trades at $140 per user. However, this never translates into actual revenues for the company.

Do we have as many users?
Facebook claims that WhatsApp user base may touch 1 billion users sometime next year. This is way too optimistic which assumes that 1/7th of world's population would use WhatsApp. Even with that number, the revenue translates into just $1 billion of revenue as opposed to $19 billion of valuation.

Text Messaging
Facebook handles nearly as many text messages as the mobile text messaging industry's $100 billion business. However, that's not a service people are ready to pay for. If you notice, people moves to Facebook/WhatsApp because it saved them SMS money as it is free. One cant expect to generate the same revenues from the users.

Revenues from Advertising
With the social media becoming free, most users do not want to pay for using the service. Revenues from advertisements, as has been proved already, is not enough to generate revenues to justify such high valuations. Anyways, WhatsApp has been famous for "No Ads, No Games, No Gimmicks". Moving away from this philosophy would be a risky bet for Facebook.

Market Cap
Facebook's current market capitalisation of $175 billion is already considered to be overestimation of the company's potential. The companies have not been able to generate corresponding revenues and the Price to Sales Ratios for Facebook (22) and Twitter (46) is amongst the highest in all sectors. How much the companies can convert the valuations into actual value for the shareholders remains to be seen.

The value per user estimated in the social networking industry is a risky matrix as users are not willing to pay and advertisement revenues will dry out eventually. The valuations of companies in this industry is extremely high and who knows, we could be creating the next bubble.

1 comment:

  1. With Revenues of $6 billion, Facebook is valued at 29.16x its current revenues. On the other hand, Facebook has valued Whatsapp at 42x its current revenues. Insane!!