Facebook Inc (FB)’s WhatsApp Purchase: Justifying The $19 Billion Deal

Facebook Inc (FB)’s WhatsApp Purchase: Justifying The $19 Billion Deal

Facebook Inc (NASDAQ:FB) paid a staggering $19 billion to buy WhatsApp, a company that generated only about $20 million in revenues last year. Many on Wall Street raised eyebrows, and called it a crazy move. No doubt Facebook paid a huge premium for a start-up in a fiercely competitive Internet messaging market.

Let’s look at the deal from another perspective. Verizon Communications Inc. (NYSE:VZ) paid about $130 billion to acquire the remaining 45% stake in Verizon Wireless from Vodafone Group Plc (NASDAQ:VOD) (LON:VOD). Investors loved it. But Verizon paid $2,984 for each of its 97 million monthly contract connections. The New York-based telecom operator made $669 from each of these connections, plus another $168 per subscriber from other sources. By that measure, the telecom company paid 3.5 times revenue per subscriber. On the other hand, Facebook Inc (NASDAQ:FB) paid $42 per WhatsApp user. Assuming WhatsApp can generate 50 cents, at best, per user in 2014, the social networking giant paid 84 times WhatsApp’s revenue per user.

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Facebook can’t afford to be left behind

But the lofty valuation can be justified, to some extent, by looking at Mark Zuckerberg’s vision. As he gears up to connect the next 5 billion global users to the Internet, and to Facebook Inc (NASDAQ:FB), Zuckerberg knows that most of these users will get their first Internet experience on mobile rather than PCs. That’s because most of them will come from emerging countries like India, Indonesia and Africa. If Facebook isn’t at the front when they access the Internet, the company risks being left behind because there are many alternatives today. The new crop of smartphone apps have threatened to eat into the social networking giant’s audience. And the WhatsApp deal can address this issue.

Google Inc (NASDAQ:GOOG) is putting its services front and center on smartphones. Its Gmail, Google Search, Google Calendar, Gtalk, Google+, YouTube and other services come pre-installed on Android OS, which runs on more than 80% of smartphones sold today. It ensures that users begin to see and use Google’s online services from the beginning.

Facebook investors shouldn’t underestimate the power of one billion users

Mark Zuckerberg is seeking help from the telecom industry to provide low-cost Internet access to emerging market consumers. Over the past few years, he has partnered with more than 150 telecom companies to offer free or discounted access to Facebook Inc (NASDAQ:FB) on mobile. Carriers benefit when such users upgrade to additional data plans. Of course, Zuckerberg’s plan to provide Facebook access to the remaining world is a long-term project. And he was right in saying that the social networking giant has to lose money on this for quite some time.

And yes, WhatsApp is adding more than a million users every day, and it will soon boast of one billion user base. It’s crazy to underestimate the power of one billion people. Mark Zuckerberg noted that other similar messaging services are generating $2-$3 per user.

Facebook Inc (NASDAQ:FB) shares were little changed at $70.72 in pre-market trading Tuesday.

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