Facebook buys Whatsapp for $19B: Value and Pricing Perspectives
aswathdamodaran.blogspot.comThe conspiratorially inclined explanations in me thinks that there might be another reason for this extreme valuation. Considering that just last year Google offered 1B for this service, and was denied because at that time Sequoia had invested at a 1.5B valuation, and Google had been unwilling to up their offer. It would appear that a 3B price or a 2x valuation would be sufficient. But clearly it was not. And I don't think it was because of competing offers from Yahoo! or others. Here's what I think might also be happening. I think some major surveillance outfit (NSA / Five Fingers / etc.) saw that by circumventing the telecom infrastructure and allowing for massive texting information to be 'funneled' through off-site servers, to support the WhatsApp service model, that they could harvest this communication without having to involved all the individual telecoms world wide. Instead they get a direct feed into the worlds texting data by buying the 'funnel' itself. And I think that they were willing to pay any price for this. I think that once Whatsapp figured this out, and came to terms with the fact that their technology was going to be used to circumvent traditional telecom limitations, they just went after as much as they could. And that turned out the be close to 19B dollars. The irony of course is that the one founder refers to the evils of soviet totalitarianism as part of his driving force. So it may be that when every thing is said and done, he provided a surveillance tool to an emerging regime of techno-fascism, the likes of which his previous hated regime could never imagine.
Again, this is just a shot in the dark. A wild stab at a rationale. But that's what will happen with an insane price valuation like $19B.
What? Whatsapp is not secure by any means, I don't think it's even encrypted. NSA could easily monitor it using existing infrastructure. And how exactly do you propose NSA "funnel" money to FB to make this acquisition -- never mind that most of it was in newly issued stock (how does NSA compensate FB shareholders for this? how does it appear on balance sheet / income statement / cash flow?). Have you thought this through at all?
NSA regularly makes data requests to the major telecoms and to the major internet service providers. If they didn't need to, they wouldn't make the request. Obviously they still do because they need to.
Not only does FB have seed funding for the gov't, they have shown themselves to be much more inclined to provide access to their data, when compared with Google and others. FB would therefore be an excellent partner to circumvent the international telecoms through a single msg service.
Just because you can't think of how the money flows, doesn't mean it doesn't or that it hasn't. The CIA supported the Guggenheim foundation, and the Iowa Writers Workshop. They could easily provide institutional support for FB stock, thereby essentially saying to FB - get this company, and we'll have your back on the markets.
So the question is, not whether I've thought this through, since this is what I'm doing to justify the insane valuation, but whether you are willing to think it through, or instead dismiss it outright, until the time come when the evidence shows you to be wrong. As we learned with Snowden et al.
> If you are an investor, stop trying to explain price movements on social media companies, using traditional metrics – revenues, operating margins and risk.
This just seems goofy to me. If you're an investor, isn't that exactly what you're supposed to base it on? After all, you're investing dollars into the company (presumably). It seems a dangerous game of chicken, because people don't put their money into a stock just to watch them get more users, they do it to eventually get more money back. To me, that's done in 2 ways: if the company actually makes enough money and gives a dividend, or secondly by selling to a 'greater sucker'. If you ignore "traditional metrics", aren't you betting on the 2nd one?
And even if we do that, FB can really "only" grow their user base by ~5.5 times. Beyond that, you have to look at things like revenues, operating margins and risk, don't you? I understand that when FB was at 10 million people they were growing extremely quickly, so their valuation was probably crazy high, but how much growth can FB really have anymore? Now that they're public, isn't that supposed to be the time when revenues, operating margins and risk actually kick in?
For the record, this is exactly why I don't invest in social media stocks--I don't understand it. It might make sense to someone else, but not to me (yet, anyways).
He somewhat addressed that earlier, in the paragraph starting with this:
> At this stage, if you are an investor, you have two choices. The first and less damaging one is to accept that social media investing is not your game and move on to other parts of the market, where you can find investments that you can justify with fundamentals.
That's the point of the article. Markets can stay irrational longer than you can remain solvent, the saying goes.
It is a bubble. There is nothing that really drives the market except gut feel ( rationalised in various "strategies" ).
That's what it is. You can't use regular metric for the same reason you can't use regular metric playing the slots. Even though chances say you won't, you can win big and there is a new jackpot winner every few months to remind you that.
> "Why don't we sell ads"
There's nothing preventing them from data-mining messages and stripping out identifiable information (like what Google does w/ Gmail) to better target ads in other services.
Although he tries not to, the author seems to make the argument for fundamental analysis here. While he acknowledges that current drivers for the prices of social media companies are based on users and their level of engagement, he essentially concludes by saying that this is a fad.
Basically, some companies are "in fashion" the same way bellbottoms or baggy pants were, and the only way to explain why is to say, "because it's cool... for now."
Damodoran is known for his value investing analysis. He is an academic, and value investing is the only form of investing proven to work.
However, he does a good job of wearing hats of other types of investors, which is why I enjoy his analyses.
Bottom line is that social media companies will either have to sustain these valuations forever, or they will eventually fail. When times of turmoil hit, user base and engagement will not be enough save a company. Cashflow is the only surefire metric that indicates a company's success.
I took several of his classes. Brilliant professor and a very entertaining speaker. As an academic, he is a firm believer in fundamental analysis and DCF based valuation. He is level headed so he also understands that not everything can be explained with DCF.
Yes, I like him and have read much of what he has written, but I feel he missed the boat on this one.
Facebook did not buy this company to get users. Facebook bought this company because it was a threat. There is not much value in being #5 in social media. Facebook has to destroy or acquire every serious competitor that comes along, or they will start hemorrhaging users. You don't acquire a company to get new users so much as you acquire the company to keep from losing customers due to declining mind share and 'coolness', and thus to keep growing customers organically (because you are #1, not because you own FoobyAppInc). They paid $19B not because they put a dollar amount on each user, they paid that because that is what it took to get the other side to say 'yes' to acquisition. (All my own opinion, I claim no knowledge of what actually went down or what MZ actually thinks).
And that is the biggest reason I will never buy Facebook stock. You can take them out, or force their hand, with a few million dollars in VC and an idea. You don't need $50B, or what have you to challenge them, (whereas you would need at least that amount to challenge Ford, Coca Cola, and what have you).
The above is all from a value investor's perspective, of course, where you do not merely look at free cash flow valuation but also look at the company's moat (how easy is the company to defend from competitors).
edit: I hypothesize that Facebook and similar companies will find themselves in a very similar situation as Berkshire Hathaway when it was just a textile factory freshly purchased by Warren Buffett. They had to dump endless amounts of money just to break even. A competitor would buy a new loom that is 5% more efficient, and so BH would have to spend capital to get that same loom to remain competitive. It did not yield an advantage to either company. It may help the customer if prices can be lowered after the equipment is paid off, but the CEO's job is to reward stockholders, not customers. Buffett eventually shut it down as a money pit. It is not a foregone conclusion that this will happen to Facebook, but it seems likely, and is enough to have any rational value investor running away in terror.
He's definitely trying to make the argument for fundamental analysis. He's been making that argument for the past thirty years.