Earlier this 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 strategic sense for Facebook? The popular way to value WhatsApp is based on a price per active user, which with 450 million users works out to be $42 per WhatsApp user. Therefore, on this measure Facebook bought WhatsApp at a premium to the $30 per user that Facebook bought Instagram last year, suggesting that Facebook thinks that it can ultimately make more money with WhatsApp.
But is Facebook properly evaluating the companies that it buys? And will Facebook ever earn back the $42 or even $30 from each and every user? Maybe or maybe not, but considering that just last week the Japanese firm Rakuten bought a similar messaging app called Viber for “only” $9 per user, Facebook paid much more than Rakuten for its new messaging business. However, there are many unknowns, such as the possibility that valuations should be different in different parts of the world, and the respective companies abilities to grow number of users and to maximize the monetization of those users.
It appears that Facebook, while having the luxury of a large stash cash, is giving WhatsApp a lot of credit for future success.