WhatsApp Is a Great Monetization Opportunity for Facebook Inc.

WhatsApp can be a multi-billion dollar revenue machine for Facebook.

Jun 3, 2014 at 10:15AM

Facebook's (NASDAQ:FB) acquisition of WhatsApp was a great strategic move in terms of gobbling up a rapidly growing competitor. The social media company has been criticized for paying a large sum of $19 billion to acquire a company without a proven revenue base.

WhatsApp is seeing robust growth in increasing its user-base, and more importantly, WhatsApp users are very engaged. WhatsApp can be a big revenue generator for Facebook going forward, and might prove to be a great financial transaction as well, in addition to being a strategic deal, by Mark Zuckerberg.

The company surpassed 500 million users in the last month, which speaks to why Google (NASDAQ:GOOG)(NASDAQ:GOOGL) reportedly tried to acquire WhatsApp for $10 billion, but couldn't get its founders to agree on terms.

Explosive growth
Facebook's acquisition of WhatsApp has put the social media giant into the forefront of the cross-platform mobile communications space, as WhatsApp has substantial reach and user engagement in growing regions of the world.

Facebook disclosed that the worldwide messaging volume on WhatsApp's platform was more than 53 billion daily, with more than 700 million uploaded photos and 100 million videos every day. WhatsApp's metrics are growing at more than 100% year over year. Such explosive growth by WhatsApp prompted Facebook to lay out such a large sum to acquire WhatsApp, before it attracted further interest from bigger rivals like Google. 

With WhatsApp crossing 500 million users, the company could be well on its way to having more than 1 billion users in years to come. Once WhatsApp crosses the 1 billion user mark, or sooner, Facebook would likely start to monetize it aggressively. 

WhatsApp is a multi-billion-dollar opportunity
Cantor Fitzgerald analyst Youssef Squali stated that monetization of WhatsApp is likely going to kick off in 2016, and is going to be a multi-billion-dollar opportunity for Facebook. Considering the fact that Facebook laid out $19 billion to acquire WhatsApp, the analyst is spot-on with respect to WhatsApp's revenue opportunity. 

Since WhatsApp users are extremely engaged and are cross-platform across all mobile operating systems, the app provides a lot of utility to users and will remain very "sticky." WhatsApp isn't an ad-supported business model like Facebook, but it instead collects a small fee of $0.99 per year after a one-year trial. But, to recoup the massive investment laid out by Mark Zuckerberg, the company likely has to evolve to an ad-supported revenue model.

If WhatsApp becomes an advertising-based business, like Facebook and Instagram, Cantor Fitzgerald's estimates don't look overly lofty. Considering that WhatsApp should be hitting 1 billion users globally, an ARPU of $2 would make the company a $2-billion-per-year business. Facebook's own revenue per user in the last 12 months stood at $7.46, which goes to show the possibilities for WhatsApp in the future. 

Going forward
Facebook can earn substantial revenue and earnings from WhatsApp if it decides to make slight changes in WhatsApp's business model. But, that remains a grey area for now. WhatsApp clearly remains in growth mode, and will likely be focused on growing its user base and engagement in the near future.

But, once that phase is over, the company will look to monetize this global asset, and Facebook's earnings per share will see further boosts. Facebook's EPS grew more than 170% in the last quarter to $0.25, and once such a valuable asset starts being aggressively monetized, the company's EPS will see incremental growth and drive more upside in Facebook's stock price. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). 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.

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