Editor's note: This research note was originally published by Hedgeye analyst Hesham Shaaban on February 20, 2014 at 15:02 in Internet & Media. For more information on our subscription service click here.
ACQUISITION SUMMARY
- WhatsApp is a mobile messaging app with ~450M users (~70% are active daily)
- WhatsApp will continue to operate as an independent & autonomous company
- Facebook will pay ~$19B for the company ($4B cash/$15B in FB shares)
ACQUISITION TAKEAWAYS
Monetization Strategy = Slippery Slope
WhatsApp CEO Jan Koum suggested that they have a clear monetization strategy in place. While WhatsApp is essentially free to download, in some instances, the app requests an annual fee of $0.99. However that isn't largely enforced if the user declines to pay. Further, the company is not running ads on the app; which means that they're essentially not monetizing the product.
Jan Koum also suggested that monetization is not a priority for the company right now; deferring to 5-10 year window as his focus. More importantly, the company is not planning to introduce ads to its service; suggesting the only means for monetization will continue to be the user, which is comical since FB doesn't even charge its users.
The assumption that Jan Koum is making is that the WhatsApp user is sticky, and that they would be willing to pay something for a service that has a series of free substitute options. While the cost is nominal, it would be a deterrent to growing its current user base, if not sustaining it, if the company tried to enforce the annual fee more aggressively.
Acquisition Price > Addressable Market
The street seems to be justifying the $19 billion acquisition price on a cost/user basis; suggesting that FB is getting a good deal since it is paying $42 per user for WhatsApp vs. its own per-user valuation of $140; essentially a 70% discount. The inherent flaw in this analysis is simple: the FB user is far more valuable than a WhatsApp user because FB can actually monetize its user base; likely by a much higher margin than is implied by the WhatsApp per-user valuation.
The more telling factor is that the $19 billion that FB will pay to acquire WhatsApp is actually larger than the total addressable market for the app. The addressable market is as follows:
- Global Paid App Market: ~$20 billion
- Global Mobile Ad Market: ~$15 billion.
Once again, Jan Koum suggested that he doesn't want to monetize WhatsApp via ads, so the current addressable market is the $20 billion Paid App Market. In actuality, it's likely much smaller. We're not sure what percentage paid messenger apps represent of the total, but given that most of these apps are free, we doubt it's a meaningful percentage (if any).
In short, the current addressable market for WhatsApp is a small fraction of what FB is paying for the company.
Now the obvious counter is that both these markets are rapidly growing and will continue to do so. We're not disputing that. But how much share can WhatsApp hope to gain in a market with existing competition that generally doesn't charge the end user for messaging services? We doubt much.
Hesham Shaaban, CFA
203-562-6500
@HedgeyeInternet