Last week, Facebook announced that they were buying the instant messaging company WhatsApp for $19 billion. Where does this valuation come from, and does it make sense for Facebook to buy WhatsApp?
One way to evaluate WhatsApp is based on the price for each and every user, which with 450 million users works out to $42 per WhatsApp user. Therefore by this measure Facebook bought WhatsApp at a premium to what Facebook bought Instagram for last year (close to $30 per Instagram user), suggesting that Facebook believes it can ultimately make even more money with WhatsApp than it can with Instagram.
But is Facebook properly evaluating any of the companies it buys based on price per user? Will WhatsApp ever earn $42, or even $30 for each and every user?? Maybe or maybe not, considering that just last week, the Japanese firm Rakuten bought a similar messaging app named Viber for only $9 per user, a greatly different valuation for this messaging firm which is centralized in Japan. To be fair, there are unknowns such as whether the average Viber user is worth more or less than the average WhatsApp user, how well the respective companies can gain and retain users, the savviness, creativity, and ingenuity of company management to monetize it’s users, etc..
It appears that Facebook, while having the luxury or a large cash stash and getting brownie points forbeing bold, is giving WhatsApp a lot of credit for future success.