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Facebook made a mistake in overpaying for a mobile messaging app. Don’t make that same mistake.
Facebook (Nasdaq: FB) stunned the world earlier this year when it announced plans to pay $19 billion for WhatsApp. At the time, the mobile messaging app had around 450 million active users. Based on those figures, Facebook paid around $42 per user.
It seemed at the time that Mark Zuckerberg must have been out of his mind to make such a deal. And while we don’t hear much about the WhatsApp deal anymore, I tend to agree with that sentiment.
The chart above comes from Business Insider and compares the growth of monthly active users between the top four social networks and the top four mobile messaging apps.
As you can see, it is only a matter of time before mobile messaging apps overtake social networks in terms of active users. And as the chart shows, it’s not like we’re seeing users flee social networks. The reality is that we’re seeing mass adoption of mobile messaging apps across the globe.
But charts like this are dangerous. This one in particular paints a compelling picture of an industry on the rise. It’s the kind of compelling picture that makes someone pay $19 billion for a mobile messaging app.
I personally believe Facebook grossly overpaid for WhatsApp.
At the time of purchase WhatsApp had 450 million active users. This was one of the main selling points touted by Facebook following news of the transaction.
Today, Facebook’s own standalone messaging app has over 500 million active users. WhatsApp continues to boom, with roughly 600 million active users. In India, the number of WhatsApp users jumped from 20 million to 70 million in just the last year.
The ability to send texts, videos, make phone calls and even play games with users anywhere in the world for free is quite an exciting concept. And I understand the potential for profit in this concept.
Not only can these companies charge users a small fee – as WhatsApp does after a year-long “free trial” – there is a significant opportunity to profit from user data, targeted advertising, money transfers, selling games and other in-app purchases like stickers.
But just because something is tremendously exciting and is showing signs of potentially being tremendously profitable doesn’t mean you should buy it at any price.
Zuckerberg’s WhatsApp purchase shows that the market seems is entirely too excited about these mobile messaging apps. Bloomberg View’s Matt Levine did a great review of the purchase, digging into Facebook’s financial disclosures and forecasts for its new WhatsApp division.
Even by Facebook’s own estimates, WhatsApp is only worth around $2.8 billion to Facebook. The remaining $15.3 billion it paid for WhatsApp is marked on its balance sheet as “goodwill.”
That’s a lot of goodwill.
Levine sums up the ridiculousness of the $15.3 billion in goodwill on Facebook’s balance sheet:
Importantly, it means you don’t amortize it: Facebook will amortize those $2 billion worth of users over seven years, reducing net income by $289 million a year, but that $15.3 billion of goodwill will just sit on its balance sheet until WhatsApp meets the inevitable fate of all social-media things.
Mobile messaging apps offer some incredible features. I personally use Snapchat several times per day. Millions of people do.
But just because these apps are attracting hundreds of millions of users doesn’t mean the companies behind them deserve to be valued in the billions.
Essentially, Facebook’s purchase of WhatsApp means you should value Facebook $15.3 billion lower than you otherwise might. That’s enough for me to steer clear of Facebook’s stock, at least for now. And I’d certainly suggest you resist the urge to gamble on other mobile messaging apps.
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