Why Facebook's New App May Be More Valuable Than We Realize

Among the reasons Facebook may have paid so much for WhatsApp, this reason may be the best.

Feb 27, 2014 at 7:30PM

"There's been so little precedent for business at this scale that we have a hard time simply comprehending all of this," said The Wall Street Journal author Dennis Berman about Facebook's (NASDAQ:FB) announcement of a deal valued at about $19 billion to acquire WhatsApp, a multi-platform messaging service. "I'm still learning, too." Berman's reaction to the deal eloquently encompasses the general response from the media and the Street; $19 billion for a 55-employee company is simply a challenge to comprehend, and it's going to take a while -- if ever -- for the general public to make sense of it.

Fb Whatsapp

Image source: Facebook.

In my efforts to get a better grasp on exactly why Facebook spent so much on WhatsApp, I've uncovered one key reason Facebook may have interpreted the messaging app as such an incredibly valuable company: Monetization of the app is in still in its infancy.

Monetization has only just begun
Just days after Facebook announced the deal to acquire WhatsApp, the small company announced a new and valuable feature in its efforts to bring "rich, affordable, reliable messaging to every phone in the world." At the Mobile World Congress conference in Barcelona this week, co-founder and CEO Jan Koum said it would begin offering voice calls as early as April. The new service could be an early move to add another revenue stream to the service.


Image source: WhatsApp.

Given the fact that WhatsApp currently only has just one small revenue stream of one dollar per user after a user's first year, any new revenue stream is incredibly meaningful. But do such nominal revenue streams come even close to meriting a $19 billion valuation? Considering the company already has almost a half a billion monthly active users and wants to reach 2 billion in the coming years, nominal revenue streams do add up.

So it is in this example of simple ways to add another revenue stream that I found my first reason to believe that there could be a day we look back and realize that a $19 billion valuation for WhatsApp made sense. Perhaps WhatsApp is so early in its monetization stages that we are clueless as to just how valuable a fast-growing massive network of this scale really is. Facebook CEO Mark Zuckerberg seems to agree that WhatsApp's monetization is still in its early stages, explaining at the Barcelona conference that other messaging apps are already getting $2-$3 per user.

Meaningful monetization won't happen soon
Investors shouldn't hope to see Facebook get its money's worth out of this acquisition anytime soon. Not only is the app opposed to having ads on the platform, but Zuckerberg has said that WhatsApp will continue to operate independently. But considering what this disruptive app has done with 55 employees already, it's a wonder what WhatsApp could accomplish with access to Facebook's enormous resources.

The point isn't that the price Facebook paid for WhatsApp makes sense, but that there may be far more value to this multi-platform messaging service than we would initially imagined.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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