Please ensure Javascript is enabled for purposes of website accessibility

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

By Daniel Sparks - Feb 27, 2014 at 6:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

"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 (META -0.79%) 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.

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.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$179.47 (-0.79%) $-1.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.