Is Facebook's $19 billion buy brilliant or moronic?
Snicker all you want, but the company didn't get to where it is today by being obvious, safe and boring.
Even for Facebook, that's a staggering amount to pay for a company with estimated 2013 revenue of only $20 million. It represents almost 10 percent of Facebook's overall value -- for a "messaging app."
So in the wake of the announcement, the usual chorus of keyboard pundits took to Twitter to snicker together and pronounce Facebook and its CEO, Mark Zuckerberg (pictured), brain dead.
But Facebook buying WhatsApp for $19 billion isn't a brain dead move. It's just bold. Very bold.
Like other bold moves, Facebook's WhatsApp deal could end up looking brilliant. Or moronic.
That's what makes it bold.
If it were guaranteed to end up looking brilliant, it wouldn't be bold. It would be obvious, safe, and boring. And Facebook hasn't built a service used by one-sixth of the world's population in 10 years by being obvious, safe, and boring.
I don't know how Facebook's WhatsApp deal will end up looking -- and neither, it's worth noting, do any of the pundits who are pronouncing it brain dead. Based on everything I do know, though, I think the odds are that it will end up looking brilliant.
- WhatsApp's growth and usage is absolutely mind-boggling. Five years after its founding, the company has 450 million active monthly users, of which a staggering ~315 million use it every day. WhatsApp is adding 1 million new users a day — 1 million! Facebook thinks WhatsApp could have 1 billion users in a few years, and this estimate seems conservative. (Facebook itself only has 1.2 billion users.) WhatsApp also does a lot more than "text-messaging." It allows users to send photos, videos, and voicemails to each other. In short, it allows users to do a lot of what Facebook does. So, again, Facebook really does appear to be buying "the next Facebook."
- WhatsApp already has a powerful revenue model, and other successful messaging apps are showing the potential for it to add many more. WhatsApp ostensibly charges its users $1 per year after the first year. ("Ostensibly" because I've never heard of anyone actually paying this $1). Assuming most current users end up paying the $1/year, that's a potential revenue stream of several hundred million dollars a year from WhatsApp's current revenue model alone. Meanwhile, other messaging apps like Line and WeChat have demonstrated the power of "stickers," user-to-user payments, ecommerce, and other revenue streams. When you have as many users as WhatsApp, generating even only a few dollars per year per user creates a massive business.
- WhatsApp has very low costs, so it should eventually be wildly profitable. WhatsApp currently has only 55 employees. Assuming an all-in cost of $200,000 per employee, that's a total cost base of $11 million. Let's assume WhatsApp grows to, say, 300 employees over the next few years. Then it will have a cost base of only $50-$75 million. Meanwhile, if the company's growth trajectory continues, it could easily be pulling in more than $1 billion a year of revenue in a few years. Almost all of that would be profit.
- The names of all the smart people who pronounced Facebook itself a "fad" or "worthless" and dissed every new investment in the company as "moronic" could fill a book. Most people have consistently underestimated the power, growth potential, and value of the leading social platforms, including Facebook. Facebook's $1 billion acquisition of Instagram, for example, which was then a revenueless company with 13 employees, was seen as proof that Mark Zuckerberg was a clueless kid who had no business running a major company. Meanwhile, Facebook is now valued at $175 billion, and Instagram is considered one of the smartest preemptive acquisitions in history. Nineteen billion dollars for WhatsApp is a much bolder bet than Instagram, but it, too, could end up looking a lot smarter than most people think.
Yes, but is WhatsApp really worth $19 billion?
The short answer is: No one knows. There are some financial scenarios in which WhatsApp could end up being "worth" (in a limited financial sense) a lot more than $19 billion. There are other scenarios in which it could end up being worth a lot less. The only answerable question right now is whether WhatsApp was worth $19 billion to Facebook.
And I think the answer is yes.
The bottom line: This is a very bold move. Like other bold moves, it might end up looking stupid, but it also might end up looking brilliant.
It's also a long-term move, a bet on what the future will look like five to 10 years from now, not next quarter.
In that way, this deal is a vintage Mark Zuckerberg move.
Zuckerberg continues to be one of the few CEOs (Jeff Bezos is another) who is willing to sacrifice near-term earnings and expose himself to short-term ridicule in order to make bold long-term bets. This approach has worked out great for Amazon (AMZN) and it has worked out great for Facebook so far.
In short, Facebook buying WhatsApp for $19 billion isn't stupid. It's just bold.
More from Business Insider
Zuckerberg is a Suckerberg. One must ask themselves …can one actually buy FB users? This could very possible be the proverbial iceberg …Yet, it really highlights what people value over say… feeding children. How many people do you think we could feed with 19 billion? How much do you value chat messages over the hungry? Something is very wrong in the world today and FB is one major element.
Facebook buying WhatsApp for 19 billion, "is it brain dead or brilliant":
Fed Chair Allen Greenspan,
Made a Statement Several Years Ago,
"How Can A Company Be Worth Anything When It Produces Nothing"
Less Then a Month Later the Dot Com Industry Went Broke...
Facebook and WhatsApp is a fad, they come and they go, BUT..
The Computer isn't a Microwave Oven...... So it Can't Make Popcorn
The average computer owner will use their computer for just that, MAKING POPCORN..
because "They Don't Know What Else To Do With It"..............and Mark Zuckerburg Knows It...
It's reckless behavior based on far too many assumptions. If this company was nearly as valuable as some are now claiming, the Company would have went Public. It didn't. We have not seen any revenue numbers so all this talk about money per user is PURE BS.
This is eerily similar to the days of the Dot Com Boom and Bust. The only difference, our Debt levels are far Higher and the Debt to GDP ratio has doubled. Plus the FED is sitting on $4Trillion in Bogus assets.
I've been trying to trade the Forex for years now and never could make money. I found a website called Bionic Traders which is having a special right now purchased all their videos got some help from the support and now I'm doing my own trading and making money. I will never go back to trading the Forex ever again!
"This approach has worked out great for Amazon [. . .] and it has worked out great for Facebook so far."
Both issues have never returned much (if any) profit. And yesm absence of profitability has worked out great for both issues, so far. Then again, everything on earth works out great -- until it doesn't.
Just ask Bernie Madoff, Jeff Skilling, Bernie Ebbers, et al. "So far" isn't always a reliable metric on which to bank.
Zuckerberg needs to fade away...the same as Facebook is already doing. Little Boy is burning through money quick. Personal Bankruptcy within 10 years.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The company has made at least 4 acquisitions in the space, and few people have paid any attention.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.