The Facebook WhatsApp Deal (Yes It’s Overvalued)

Facebook buys WhatsApp for $19 billion
This is the financial news that dominated the headlines for a while. The question in everybody’s mind was “Did Facebook overpaid for WhatsApp”? What’s next is an elaborated version of my response on a LinkedIn thread.

Being a “valuation” guy, these kinds of deals makes your head shake. It also shakes the core of valuation principles. It looks like I had it all wrong. I should scrap everything I learned and stick to this new principle: The less revenue you have, the higher your valuation.

Is the Facebook/WhatsApp deal over valued? If you rely on the ”standard” financial metrics that would be a yes. But since the numbers are off the chart it’s the reason we are talking about it. There’s probably a strategic side that I can’t value. (like eliminating a competitor, banking on growth, database mine gold…) After having some time to digest the news, I still think it makes no sense. However, the transaction makes Netflix and Tesla looked like deep value bargain stocks.

The transaction brings be back to the era, when ”this time it’s different”. New start-ups with no revenues were valued using the number of eyeballs hit your page got. Very little focus was on how to monetize the number of eyeballs metric. In the end the result was disastrous and a lot of people lost their savings. Today, particularly in the social media segment, I see a lot of the same ”this time it’s different” mentality, the favorite song of the market herd. It’s also a very dangerous tune often signaling an overbought stock or a market peak.

This type of apps can take off really fast. Just check Telegram, they are signing millions of users every day and the interface is almost identical to WhatsApp. For $19 billion you don’t get much barrier to entry. Anybody with some programming skill and the right backers/push can launch the “next big thing”. I’m sure the Telegram backers are waiting by the phone for a Google type company to call before the party is over.

Facebook actually tried to create their own WhatsApp clone with an app called Facebook Messenger. It was believed that FB could capitalize on their large user base but that failed miserably. In the end, I’m not sure how Facebook will make their money back for something that is likely to going to be free.

The winners in this transaction are the early investors (VCs, insiders, employees). The losers: Facebook shareholders. A comparable transaction is Microsoft’s purchase of Skype for $8 billion. As of today they still can’t turn a profit. (Using the same metrics, I wonder how much is Skype would sell for?)

The best line I have seen so far explaining the situation: ”Facebook spends $19 billion for WhatsApp. Looks like Facebook is trying to be….well the next Facebook.” I’m sure Zuckerberg will find a lot of hidden synergies between the twenty WhatsApp employees and the thousands at Facebook. ($1 billion per employee). This will end up being the biggest and fastest write-off of goodwill in human history.

On other thoughts, remember that huge press conference with Mark Zuckerberg/Facebook announcing they own smartphone (the iPhone killer)? Let me save you the Google search. Long story short, nobody was camping outside to be buy it and AT&T drop the price for $99 to a liquidation price of a $0.99! Would you still buy it for that much?


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