Instant Messaging Could Mean Instant Growth for Facebook Inc

Though panned by some industry insiders for its $19 billion WhatsApp acquisition, the social media king may have the last laugh.

Jun 11, 2014 at 2:05PM

For some investors, Facebook's (NASDAQ:FB) decision to drop $19 billion on up-start mobile messaging service WhatsApp in February may still be a head-scratcher: it certainly was at the time. There were a few, legitimate reasons some investors felt a bit uneasy following the deal. Fans of Facebook's ugly stepchild, Twitter (NYSE:TWTR), were no doubt ecstatic, wondering "what are those guys thinking?"

But with Chief Executive Officer Mark Zuckerberg and team flying high in terms of growing both users and revenue, shareholders seemed content to give Facebook the benefit of the doubt, actually boosting its share price in the days following the announcement. Looking forward, there are significant opportunities for Facebook to justify the whopping price tag for WhatsApp.

A glass half empty
If you were to look back at the reaction immediately following Facebook's announcement that it had acquired WhatsApp, you'd be hard-pressed to find many industry pundits extolling the benefits of the deal. The consensus, and it was just about that, centered on a few, key concerns.

The first, and most obvious, concern was how does a company that generates a paltry $20 million in annual revenues warrant that kind of price tag? One of WhatsApp's claims to fame, which played a big role in why it grew to 450 million users prior to Facebook entering the picture, was it charged customers $1 a year for the service. Another was its promise, direct from the founder, there would be no ads to contend with.

In large because of the above, most believed Facebook paid a gargantuan premium, particularly when that concern was coupled with questions about how to monetize WhatsApp without charging a higher annual fee or including ads. The former remains a legitimate alternative, the latter? Time will tell.

Finally, in the U.S. there was the, "Who are these WhatsApp guys?" question to consider. Even now, according to a recent study from comScore, only 31% of mobile phone users have any messaging service. And most mobile messagers use Facebook's own Messenger service.

A glass half full
It wasn't too long after the WhatsApp deal was announced that a few far-sighted analysts began to reevaluate the deal. A couple of pundits at Sterne Agee suggested that WhatsApp will generate nearly $1.2 billion in three years, with margins as high as 80%. And they may not be far off.

Already, WhatsApp has grown to over 500 million monthly average users, or MAUs, from the approximately 450 million in late February. By comparison, Twitter grew to 255 million users in its recently completed Q1, meaning Twitter's number of MAUs grew nearly the identical 50 million in the past year as WhatsApp has in less than four months. Zuckerberg seems well on his way to reaching his goal of growing WhatApp's user base to one billion. And who knows where WhatsApp goes from there?

The relatively small penetration of U.S. mobile phone owners using messaging services, if you opt to take a half-full approach, isn't a weakness, it's a fantastic opportunity. One study comparing mobile messaging services in developed countries listed the U.S. tenth. Well behind folks in Spain, that have a whopping 83% of its mobile phone owners using instant messaging. Of course, geography plays a part in that, too. With no carrier fees attached to messages sent across country borders, European and Asian users have an added impetus to use apps like WhatsApp. But domestically, there's still a lot of upside.

Final Foolish thoughts
Assuming the rumors are true, WhatsApp should be introducing a calling feature in the not-too-distant future. Will Facebook attempt to monetize a calling service? Perhaps, but just as with ads on WhatsApp, all parties say "no." Then again, Instagram is ready to be monetized, once a few of its video ad tweaks are completed, something Facebook held off on for over two years. And it's not hard to imagine the same happening with WhatsApp at some point in the future.

For now, WhatsApp's promise of no ads is a huge differentiator from Twitter who, in an effort to justify its market capitalization of over $21 billion, is going advertising gang-busters. And that could work in WhatsApp's favor as more users consider messaging. But even without ads, we know Facebook loves and can use data at a level unmatched in the industry.

WhatsApp's comprehensive data on over 500 million users is growing daily, and it includes phone numbers. Facebook has other, profitable ways to use that data, including its own site, Instagram, and Messenger. Half-full, half-empty? For growth investors, Facebook's WhatsApp acquisition warrants a healthy dose of optimism.

Leaked: Apple's next smart device (warning, it may shock you)
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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool 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."

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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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