Jan Koum, the CEO of WhatsApp Messenger, keeps a note pinned to his desk at all times:"No Ads! No Games! No Gimmicks!"
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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 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
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 ?
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.
Red Hot Penny Shares is a regulated product issued by Fleet Street Publications. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be riskier than other investments they can be relatively hard to trade and if you need to sell soon after you've bought you might get less back than you paid. Please seek independent financial advice if necessary. 0207 633 3600.
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published