3 Technology Winners: Facebook, Sina, and Netflix

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The mood was buoyant on Monday, as the benchmark S&P 500 index set an intraday high before falling back to within four hundredths of a percentage point of its all-time closing high, set in mid-January. Forgotten are the worries linked to emerging markets; investors are focused on multi-billion dollar acquisitions and initial public offerings instead, pushing the S&P 500, and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) , up 0.6%. Some high-profile growth names did better than that, including Facebook (NASDAQ: FB  ) (+3.2%), Sina (NASDAQ: SINA  ) (+4.3%), and Netflix (NASDAQ: NFLX  ) (+3.4%).

No buying-binge hangover for Facebook
I see no way to justify the $19 billion price Facebook is paying to acquire messaging platform WhatsApp, and the comments from Facebook's management team don't give me much confidence that they know how to justify it, either. The narrative they have provided so far goes something like this: WhatsApp is poised to reach a billion users. Any service with a billion users is inherently valuable. Or, as Facebook CEO Mark Zuckerberg told participants at the Mobile World Congress in Barcelona [my emphasis]: "By itself, WhatsApp is worth more than $19 billion. Few services in the world can reach one billion users, and they are all valuable." I agree with the second sentence.

There's no question that WhatsApp is a disruptive actor that has forced telecom carriers to forgo billions of dollars in revenue associated with text messages. It's not stopping there, either: Also speaking at the Mobile World Congress, WhatsApp CEO Jan Koum announced the company would add voice communication to its platform in the second quarter.

The question is, how much of the profits being harvested from telecom providers will end up in Facebook/WhatsApp's coffers, rather than simply accruing as savings to their users. For now, however, none of that appears to be troubling Facebook shareholders – the shares closed at an all-time high on Monday, up 4% from last Wednesday's closing price.

Facebook's party cheer spreads to Sina
The deal is having other effects, too. Facebook putting such a huge valuation on WhatsApp is like someone waving a cattle prod around in a rush hour subway car: Other companies in the same space feel compelled to move!

It's no surprise, then, that Chinese Internet platform Sina is reportedly considering spinning off microblogging site Weibo, in which it has a 71% stake. The trouble is that, while WhatsApp is adding a million users per day, a recent report by a Chinese government-affiliated research group suggests that active users of microblogging sites declined by a tenth last year -- partly due to competition from messaging application WeChat, owned by Tencent.

That doesn't appear to worry Sina -- according to one source that spoke to the Financial Times, they may seek a valuation of up to $7 billion or $8 billion for Weibo. That would value Sina's stake at between $5.0 and $5.7 billion – not bad when you consider that Sina's market value as of today's close is $5.1 billion. We're almost back to the mad arithmetic of the classic case study of inefficient markets from the dot.com era: The Palm carve out from 3Com. Regardless, the market is already visualizing a payday, and sent shares of Sina up 4.3%.

Netflix tips the cable guy
Finally, shares of Netflix rose 3.4% to within 1% of its all-time high on the news that it will pay the nation's largest broadband provider, Comcast, to pipe content to its customers. In other words, Netflix's costs will increase, yet the stock appreciated in response to the news. It's possible that investors are reacting positively to the fact that Netflix has come to an agreement with Comcast on an issue that was hanging over its head like the sword of Damocles.

Still, the companies did not discloses the financial terms, so it's impossible to gauge the impact of the agreement at this stage. Furthermore, it suggests that a shift in the balance of power has occurred – one that isn't to Netflix's advantage. Nevertheless, this is just one battle in what promises to be a long campaign – as the Financial Times' Lex column remarked, "Be assured: there is plenty of fighting [between Netflix and cable companies] still to come."

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