The fastest growing company in history – but is WhatsApp worth $19bn?

Is WhatsApp really worth what Facebook paid for it?

Jan Koum, the CEO of WhatsApp Messenger, keeps a note pinned to his desk at all times: “No Ads! No Games! No Gimmicks!”

That simple philosophy is a big part of how his instant messaging app is now attracting one million new users a day – making it the fastest-growing company in history in terms of users.

And last week, Facebook agreed to pay $19bn for WhatsApp. For its $19bn of cash and shares – 10% of the overall value of Facebook – it gets 55 employees and a smartphone app.

For $19bn, it could have bought clothing retailer Next, with its 50,000-plus employees, £3.7bn in annual sales and £700m profits.

Many say this is further proof of an overheated market in tech stocks. Now, I can’t claim I know more about valuing technology companies than Mark Zuckerberg, the Facebook CEO. But it’s a bit reminiscent of the price-per-eyeball type valuations we saw during the ill-fated dotcom boom.

So is that what we’re seeing here? With more than 450 million subscribers, WhatsApp clearly has something going for it, but it only makes an estimated $20m in revenue. Something’s got to give.

Will Jan Koum’s note still be pinned to his desk in a year’s time?

450 million new Facebookers

The big draw for Zuckerberg is the 450 million active customers who use WhatsApp. For those who aren’t one of this 450 million-strong community, WhatsApp is a mobile internet messaging service.

The business model is very simple. WhatsApp provides instant chat and the ability to send picture and video messages, with no adverts. The company does not store data about its users, and deletes all messages from its servers after they’ve been sent.

The app is free for the first year and only $1 per annum afterwards. As long as you have an internet connection, that’s all the service costs. So, assuming the customer base sticks with it, we have a pretty good idea what the revenues will be in a year’s time.

WhatsApp has seriously undermined the SMS text messaging market. In many countries, mobile operators charge for sending a text, so WhatsApp is an attractive alternative. It’s especially popular in emerging markets such as India where there are fewer communication choices.

It caught the competition flat-footed

The big mobile companies have clearly been outsmarted by a more nimble, entrepreneurial outfit. These customers should really belong to the network operators. But those huge network companies increasingly sit in the background like utilities, while their customers build valuable relationships with app suppliers.

In theory, WhatsApp could be vulnerable to a re-jigging of price plans by the mobile networks. But even where text messages are bundled into an all-inclusive price, as is often the case here in the UK, WhatsApp is still popular.

But there should be further WhatsApp casualties. This week, the company announced that free voice calls will be available via the app from April. This moves firmly into Skype territory and also bypasses mobile operators’ own voice services.

The growth in users has been hugely impressive. Active subscribers have more than doubled from around 200 million a year ago, and a million new users sign up each day.

This huge and growing subscriber base is the big attraction. The tiny staff and limited funding behind WhatsApp together with its rapid success, suggest low barriers to entry in this industry. But there are some pretty big barriers to getting 450 million users.

Is there scope for Facebook magic ?

Even at the price paid, the deal might still be profitable, if Facebook ‘upsells’ extra services to this underexploited and growing customer base. The trick will be to do it sympathetically without spoiling the user experience.

With revenues from paying customers working out at a mere two cents a week, there should be plenty of scope. But I’m sure the value also lies in the sheer scale of that user base which is heading inexorably to the billion mark.

Time will tell whether WhatsApp is a bargain, a $19bn white elephant, or something in between. What we can safely recognise though, is the growing importance of mobile internet. This will carry on throwing up some great investment opportunities and I hope to spot some of them in Red Hot Penny Shares.


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