A Great Business Does Not Mean a Great Investment
I was in bed this morning when Bloomberg pop up the following headline on my iPhone,
“FaceBook to buy Messaging App Whatsapp for $19B”
I believe this is one of the largest online utility platform acquisition in the last 3 years.
To be exact, $4B cash, $12B in FaceBook shares and $3B in Restricted shares (Pretty smart because FB’s own valuation is also pretty rich at P/E of 103).
So is Whatsapp a good business model?
Let’s take a look at some numbers provided by Whatsapp’s corner stone investor, Sequoia Capital: 450, 32, 1, 0
450m active user with 1 million new users sign up daily. Soon to reach a billion.
32 engineers supporting 450m user, average 1 engineer to 14m active user. A feat by itself.
1 single vision of no ads, no game, no gimmick. Business model is $1 per year, saving user $140 yearly on sms text across various mobile platform.
0 dollar spent on marketing or user acquisition. The growth is purely by user referral and this is mind blowing!
My answer would be a resounding Yes.
The reason is simple, It is doing ever ever more with ever ever less with a wide moat (network effect).
In fact, my mobile usage time fall into 3 main area; 1. Facebook, 2. WhatsApp 3. Email.
But is this a good investment for FB?
Let’s put in some key assumptions first:
1. All 450m active user pay $1 per year. (I don’t because I’m an earlier user who got it Free)
2. It will reach 1 Billion active users in one and half year time (1 million new user sign daily)
3. 50% Net Profit margin for a lean IT messaging business.
1) Price to Sales Ratio
Current Price to Sales Ratio = 19,000m/450m = 42x
Potential Price to Sales Ratio = 19,000m/1,000m = 19x
Based on even the most optimistic projection, FB values WhatsApp like a Miracle Drug because 19x Price to Sales is what investors only bestow on a small handful companies (about 35 US biotechnology or pharmaceutical companies) developing life-saving drugs.
2) Per User Acquisition
Current User Acquisition = 19,000m/450m = $42 per user
Potential User Acquisition = 19,000m/1,000m = $19 per user
Just earlier this month, Tokyo based Rakuten Inc bought the Viber internet messaging and calling service for 900m, paying about $3 per Viber user.
What this mean is WhatsApp user is 6x to 14x more valuable than a Viber user. Is that really the case?
3) Price to Earning Ratio
Current Price to Earning = 19,000m/(450m x 0.5) = 84x
Forward Price to Earning = 19,000m/(1,000m x 0.5) = 38x
Interestingly, based on Price to Earning ratio for an online platform, WhatsApp suddenly seem “cheap”.
But we have bear in mind that we are assuming that their net profit is at 50%.
That may be possible considering that their staff strength is very small (only a total 55 staff strength currently).
FB and Google’s net margin is 20% and their PE is 103x and 33x respectively.
Hence, if we base WhatsApp net profit margin at 20% as comparable to FB and Google, then their PE should be 211x (current) and 95x (forward).
Sorry, it is still a crazy valuation that my head cannot understand.
Unless WhatsApp go on to dominate the world of messaging (which there are other competitiors in Tencent (WeChat & QQ), this is a valuation which can probably be reached in the most optimistic of scenarios.
In a nutshell, WhatsApp is a Great Business but an extremely Pricey Investment based on $19B.Earning Disclaimer
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