Facebook Inc (NASDAQ:FB) has had to deal with some negative sentiment regarding its future in the last couple of years. Firstly, its launch as a publicly listed company was less than successful, prompting accusations that its market cap was hugely inflated. And then the now-infamous Princeton University study was published which suggested that the website’s user base could have plummeted within the next few years.
However, despite the fact that the casual observer might believe that it is very much damage limitation time for Facebook at the moment, the company has actually done a very good job of improving its status over the last couple of years. Its profitability has steadily increased on the back of impressive mobile advertising revenue, and the Facebook share price has shown a distinctly upward trend in the last six months:
Record Facebook acquisition
Further signs of Facebook’s bullishness have emerged in the last 24 hours, when the world’s biggest social media site added to its growing portfolio of acquired companies. This latest deal for the mobile messaging service WhatsApp not only reflected the aforementioned emphasis on the mobile marketplace, but also blew all of their previous acquisitions well and truly out of the water.
Previously the most money that Facebook Inc (NASDAQ:FB) has splashed out on acquiring another company was the $1 billion it spent to acquire the much more notable Instagram. But the deal for WhatsApp has absolutely dwarfed the Instagram buyout, with Facebook willing to spend a scarcely believable $19 billion to purchase a company that many people will never have encountered at all.
Already there are strong signs from market trading that the city sentiment is that Facebook has significantly overvalued WhatsApp in this acquisition:
But the markets don’t always get it right, so what is Facebook hoping to get out of this deal?
Mobile monetarization
Clearly the central focus of this deal is Facebook’s mobile engagement. This is obviously a key area of all social media economics, purely because most people love to have a bash on their mobile as soon as they have a spare moment to themselves, and a large number of this potentially mammoth user base will head straight to social media when they do. As I wrote previously with regard to Twitter, monetarizing this mobile user base is absolutely critical to the success of any social media site.
According to analysis from Sterne Agee, the purchase of WhatsApp will enable Facebook to strongly tap into the mobile messaging market. The commercial nature of this sector may well be overlooked, but when one notes that the value of the global mobile messaging market is estimated to be more than $100 billion then it is clear that Facebook Inc (NASDAQ:FB) is trying to get acquire itself a big slice of this sizable cake.
Sterne Agee has already predicted that the price tag associated with this deal will not necessarily go down well with investors. This is hardly a Nostradamus-esque prediction given that the $19 billion fee looks simply mind-blowing on paper. However, they also believe that the already weighty user base that WhatsApp has built up – in the region of 450 million according to the company itself – will provide a potentially fertile market for Facebook.
Perhaps even more significant in this deal is the rate of growth that WhatsApp is currently achieving. Around one million people per day are signing up for WhatsApp, and this is the sort of figure that will particularly interest Facebook. The disappointing financial results of Twitter, and the negative market sentiment towards them, were at least partly predicated on the ability or otherwise of Facebook’s rival to attract new users to the site.
Is WhatsApp a Twitter-beater?
Evidently, Facebook Inc (NASDAQ:FB) views WhatsApp as a company with a huge potential for growth, given that WhatsApp’s current user base is double that of Twitter, and well on its way to acquiring one billion users within the next couple of years. By contrast, Twitter Inc (NYSE:TWTR) is greatly struggling to attract new users to its site, having added a mere nine million users during the last quarter. Yet Twitter is valued at $33 billion, suggesting that despite the eye-popping figure involved, Facebook may not have overestimated the value of this company after all.
In a neat symmetry given the price that has been paid for the company, 19 billion messages are sent via WhatsApp every day. The founder of Facebook, Mark Zuckerberg, quite clearly views the deal for this highly active company not as some form of folly, but as a critical component of a broader strategy to convince the market that Facebook is able to attract and monetize a large mobile user base over a significant period of time. Although trading is going strongly against them at the moment, in the long run Facebook may be able to dismiss this reaction as a classic example of blinkered short-termism. It wouldn’t be the first time.
