Facebook wants to connect the world. Source: Wikimedia Commons
Mark Zuckerberg and his company, Facebook (FB +0.30%), have been on an acquisition spree as of late. Since 2012, Facebook's purchased a reported 24 companies. And while many of these transactions are undisclosed, of those that have been disclosed, the targets range from $15 million to $19 billion.
There are three acquisitions that stand out above the rest, mostly because they're the three largest reported transactions -- Instagram, WhatsApp, and Oculus VR. Totaling $22 billion, these transactions confirm that Facebook is a purpose-driven organization dedicated to its founder's vision of connecting the world.
Instagram's promise
Facebook started its large acquisition spree early by buying Instagram early 2012. In fact, Facebook bought Instagram before its own IPO. The company paid $1 billion for the transaction in both cash and stock and continued to allow Instagram to operate as an independent service. At that time, Instagram was one of the most downloaded applications on Apple's iOS, with nearly 30 million users, and it had just released an app for Google's Android OS.
However, its contribution to Facebook's top line has been slow. The company has experienced pushback from users in regard to ads in Instagram feeds; both Zuckerberg and COO Sheryl Sandberg said they are moving slowly in terms of monetization. There have been positives from the purchase: The company has grown from 30 million to roughly 200 million users, and it's slowly rolling out ads by balancing the need for monetization with user experience in mind.
Yet Instagram presents a paradox of sorts to Facebook. In the race for eyeballs, Instagram ends up competing against Facebook's own feed. And since Facebook isn't as efficient as monetizing users on Instagram as the company is on its own site, Instagram growth can be a short-term negative for the stock. However, right now it appears the company is moving on all fronts to grow and connect users and understands that monetization growth will come.
WhatsApp made Instagram seem cheap
The one thing Instagram had going for it was its price. At the time, paying $1 billion for a photo-sharing service seemed insane, but after the deal for text messaging service WhatsApp was announced at a $19 billion price tag, it seems downright cheap. When compared with WhatsApp on a cost-per-user ratio, Instagram stands out as a good deal.
| Acquisition | Cost | Users | Cost Per User |
|---|---|---|---|
| $19,000 | 450 | $42.22 | |
| $1,000 | 33 | $30.30 |
Figures in millions except cost per user. Source: The Wall Street Journal.
The Instagram purchase valued users at $30 at the time of the purchase, while WhatsApp valued users at $42. And while the monetization methods are different -- Instagram uses an ad-based model and WhatsApp employs a subscription-based model -- the 40% premium of WhatsApp to Instagram is rather shocking.
Since WhatsApp charges $0.99 per user per year -- after a free year -- this valuation would take over 43 years for each pre-acquisition user to pay the cost of the purchase from a revenue standpoint. Apparently, Zuckerberg is betting on substantial user growth from this line of business.
And so far, it appears he's getting that growth. At the time of Facebook's mid-February filing, it was widely reported that WhatsApp had 450 million monthly active users. Six months later, that number stands at 600 million -- that's an estimated 78% annualized growth. Not only that, but this text messaging service also serves as a new venue for Facebook to connect users.
Oculus VR: A moonshot that just may work
The most recent high-value purchase was Facebook's Oculus VR acquisition. By paying a cool $2 billion, Facebook entered the fascinating world of virtual reality. In addition, it appears to be Facebook's first actual device -- if one doesn't count the Facebook phone partnership with HTC -- in the Oculus Rift headset.
Right now, many are focusing on Oculus' gaming features, but the potential is vast. With its immersive technology and stereoscopic display, the company has the potential to redefine learning and communications. If Oculus can achieve half of its promise, investors will be handsomely rewarded.
Final thoughts
Facebook's been on something of an acquisition spree of late by shelling out billions for these three companies. The company's wisely paid a combination of stock and cash for these companies, taking advantage of its own generous stock valuations. If you listen toZuckerberg, he's focused on one thing -- to connect the world. And he's transitioned his organization to fulfill that purpose.
From photo sharing to text messaging to immersive virtual reality, Facebook is looking to constantly redefine the way you share your life and interact with the world. If the company can succeed in these lofty goals, its $200 million market cap is laughably undervalued.
