Not many appy returns – No maths can justify Facebook’s $19bn purchase of WhatsApp


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Amid all the feverish coverage of Facebook’s purchase last month of the popular messaging app WhatsApp for $19bn (£11.4bn) in cash and shares there was one comment that particularly caught The Value Perspective’s attention. The comment suggested that if you ignore the rather large price-tag then Facebook may have gotten quite a deal on WhatsApp. Comparing the deal to the central premise of the film and book ‘Moneyball’ our commentator noted that it was all about the numbers.

While hardly known for our readiness to ignore any price-tag – regardless of the size – we love Moneyball and certainly have no argument with that final observation so let’s use some number to see how much of a deal Facebook has really got. Aside from that $19bn price, there are actually not too many hard figures to work with but WhatsApp’s active monthly user numbers are reported to be 450 million.

Now, we are going to need some sort of valuation to work with so let’s be kind and pick one that would be considered generous for a mature, as opposed to growth-stage, tech business – more than Microsoft, Cisco or any other of that ilk would expect to attract. Call it 5x sales. If we work on the assumption that a mature WhatsApp was valued at 5x, it would need sales of $3.8bn a year – that is, $19bn divided by 5.

We also know the company’s revenues for last year have been reported as $20m, thereby requiring a growth in sales of just the 18,900% to reach that $3.8bn figure. We have another number – $1. That is WhatsApp’s annual charge per user, which means we can calculate that only some 4.5% of the company’s active user base actually pay to use the technology. The other 95.5%, at present, do so for no charge.

As such, if we assume only 4.5% of its user base pays just $1 a year then, in order to generate sales of $3.8bn, you would need some 85.5 billion people to subscribe to WhatsApp. This is of course somewhat unfair as the user number of 450 million is a current number while the $20m is historic. Given the rapid growth, the figures will be skewed and 4.5% may well be undercooking things. So let’s try again.

This time, let’s assume every single WhatsApp user pays for the privilege. Yes, we know you do not have to pay until you have been on the system for a year but we are valuing the mature WhatsApp so let’s also assume everyone is now paying their $1. On those numbers, you would only need … ah … 3.8 billion people to subscribe to WhatsApp, which is still quite a lot – some 54% of the current global population in fact.

One other snag is some 5 billion people around the world do not have access to the internet, meaning our 3.8 billion target is almost double the number that do, which again seems bullish. Nevertheless, if Facebook found a way to make the numbers work, surely we can too – so let’s push a little further into the future and assume all 7.1bn people in the world can access the internet.

Yes, clearly if it is the future, there will be more than 7.1bn people but we are already making enough assumptions to be going on with. What is more, maybe WhatsApp could charge more than $1 a year – after all, what’s $1? Well, according to the United Nations, 1.2 billion people – 17% of the global population – live on less than that per day.

While $1 may seem cheap to us, in a global context, and that is what we need to make the maths work, it is a not insignificant amount of money. The average salary in the UK is £26,500 a year, meaning the UK equivalent of paying a day’s earnings to subscribe to WhatsApp would be £73. That would have to be one impressive service and the likelihood is most people would choose to use a cheaper – or free – alternative.

That’s another potential problem for WhatsApp, of course, because such alternatives do exist – for example, Viber has some 100 million active users, Line has passed 200 million and Wechat now stands around the 270 million mark. Up to this point, another of our assumption has been that WhatsApp would have 100% market share but that is very unlikely to happen.

So, just to recap, to make the numbers work, if WhatsApp continues to charge $1 per user and the percentage of users stays constant, it would need more than 12 times the number of people living on the planet. If you assume everyone pays, you still need more than half the people alive today and they would all need a phone and internet access and WhatsApp would still need 100% market share and …

The reality is that WhatsApp is going to need alternative revenue sources. To be fair, the company knows this and, having publicly ruled out introducing advertising, games or other gimmicks, has announced it will be focusing its attention on voice-calling and video-chatting. Ah … a market where one company is already so dominant its name is commonly used to describe the process – ‘to Skype’.

Skype, with its 300 million active users, is the pre-eminent franchise and technological behemoth in the voice-calling and video-chatting sector and – being funded by advertising – it offers its services for free. The company can also point to revenues of some $2bn a year, which as it happens was not enough to protect Microsoft from accusations it had wasted its money when it bought Skype back in 2011 for $8.5bn.

That made it significantly more of a ‘bargain’ than WhatsApp and yet, at the time, commentators were falling over themselves to pronounce there was no way Microsoft would ever make any money from the deal. And indeed it may never do – neither The Value Perspective nor anyone else has enough details to be able to take a view one way or the other.

That is because, with Skype completely absorbed within the Microsoft beast, one simply cannot tell. But it turns out the company was an absolute snip compared to WhatsApp because its buyers do not need everyone in the world to be using it or 100% market share to make the business stack up. So, yes, it is all about the numbers and, for Facebook and WhatsApp, the numbers are pretty damning.

Facebook founder Mark Zuckerberg has protested WhatsApp is cheap at $19bn but, while that may be so if you are a multibillionaire, it certainly is not the case in any meaningful sense of the word. When weighing up the implications of mergers and acquisitions and indeed Initial Public Offering’s, which these days are coming thick and fast, investors need to be constantly vigilant.

They need to concentrate on the numbers that matter while ignoring the stories swirling around them that, like siren songs, risk leading their returns onto the rocks. Among those discussing the idea of a ‘Tech Bubble 2.0’ back in 2011 – in articles such as Whoops apocalypse and Fear of the new – was The Value Perspective but we may have been a bit early. This is a whole new level of market lunacy.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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