Did Facebook Just Save $3 Billion?

Apparently, Facebook (NASDAQ: FB  ) offered to buy Snapchat for $3 billion in cash and was rejected, according to The Wall Street Journal.

For those unaware, Snapchat's entire social experience is based on sharing photo and video clips that only can be viewed for a maximum of 10 seconds before being permanently deleted. It's very popular with teenagers, and the service hasn't earned any revenue.

What on earth was Facebook thinking?

Signs of desperation
My gut reaction is that Facebook is completely desperate for teenage engagement, because this alleged deal comes hot off of Facebook's earnings report, which acknowledged for the first time that daily usage among U.S. young teenagers declined sequentially. But before I acknowledge my gut, let's think about Facebook's previous behavior.

When Facebook purchased Instagram in April 2012 for $1 billion, the photo-sharing network had only 30 million monthly active users, or MAUs, and earned no revenue; the deal looked like a complete flop. Fast-forward to today, and Instagram has begun monetizing its user base, which has grown to over 150 million MAUs. Sure, Snapchat for $3 billion sounds like complete madness today; but $3 billion today could potentially be worth a lot more tomorrow.

Crunching the numbers
Snapchat doesn't report MAUs, but it did report in September that 350 million "snaps" are shared daily between users. To arrive at Snapchat's MAU base, we have to make some sort of assumption about the average number of daily "snaps" shared per user. A recent Pew Research survey suggests that Snapchat has 26 million MAUs, which breaks down to about 13.5 daily snaps per MAU, which I don't think is unreasonable, considering the average 18 to 24 year old sends 67 text messages a day.

Now, if we take Facebook's advertising revenue per mobile user of $1.01 last quarter, and apply it to Pew's MAU estimate, we're talking about roughly $105 million in annual revenue. The billion-dollar question is the premium Facebook is willing to pay for an in-demand service. Considering Facebook shares currently trade at 17.4 times its annual revenues, which is low for social networking companies, I'd be willing to wager that Snapchat would command a premium to this figure.

But even at 17.4 times annual revenue, we're talking about a more than $1.8 billion valuation. At these multiples, $3 billion doesn't seem that far off the mark, especially after accounting for the likelihood that Snapchat will continue attracting users in the short term, and Facebook will need to pay a hefty premium.

Of course, Snapchat going from zero to its full potential isn't going to happen overnight, and it isn't even a guarantee that Snapchat could ever reach this potential, given the fickle nature of teens. To make matters more challenging, Facebook will likely have to invent a new ad format that plays into Snapchat's strengths, like an ad format that vanishes in five seconds or less.

Not that crazy?
If there's one company that can turn an unproven business into a proven one, it's Facebook. Let's not forget that Facebook turned the "threat" of mobile cannibalizing its desktop ad business into a massive revenue center. Nowadays, Facebook's mobile revenue has grown to make up 49% of its ad revenue. The bottom line is that Facebook is a creative and highly adaptable business. For $3 billion, it's pretty clear that Facebook sees a lot potential here -- but it's even clearer that Snapchat sees more.

Got iPad?
The new iPad Mini Retina might be hard to come by this quarter, given all the reports of supply constraints. Well, we're going to be sure to get a few -- and give them away! That's right: For the first time ever, The Motley Fool is hosting a contest where you can win a free iPad Mini Retina. All you have to do is tell us why you love The Motley Fool by clicking here! We'll pick the three most Foolish submissions to receive a free iPad Mini with Retina display.

See full terms and conditions by clicking here

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2728773, ~/Articles/ArticleHandler.aspx, 9/27/2016 3:10:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,219.50 124.67 0.69%
S&P 500 2,158.67 12.57 0.59%
NASD 5,301.77 44.28 0.84%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 2:55 PM
FB $128.71 Up +1.40 +1.10%
Facebook CAPS Rating: ***