Seven hundred million people now use Facebook (NASDAQ:FB) Messenger to communicate with their friends, family, and that guy they just met at a party. The Facebook add-on is rapidly approaching the size of WhatsApp, the messaging service Facebook purchased last year for $22 billion. WhatsApp surpassed 800 million users in April, but it's growing at a slightly slower pace than Messenger.
Despite Messenger lagging slightly behind WhatsApp in user numbers for the time being, I believe Messenger is worth more than its messaging peer. Facebook is closer to seriously monetizing Messenger, and regional demographics favor Messenger's monetization potential over WhatsApp. With Facebook's market cap standing at about $250 billion, both messaging services seemingly account for more than 10% of the company's value.
Tied to a Facebook account
Every Messenger user is required to sign up for Facebook. As a result, Facebook has significantly more data on Messenger users than it does on WhatsApp users (at least those who don't also use Facebook). That data will demonstrate its value as Facebook convinces more businesses to establish a larger presence on Messenger.
In the meantime, Facebook benefits directly from users on Messenger. While both Messenger and WhatsApp use secure end-to-end encryption -- meaning Facebook can't see what you're talking about -- the company does collect data on who you're messaging with and your location. It can use that data as part of its News Feed and ad-targeting algorithms to decide what content and advertisements users see. The result is a better user experience and higher-priced ads in Facebook's flagship app.
Going forward, Facebook plans to turn Messenger into its own platform. It has already opened the service up for developers to build on top of, and it's working to attract game developers to the platform. Games and location services have the potential to produce revenue for Facebook, particularly when combined with its planned payments service.
Monetizing WhatsApp has proved difficult
The only present form of monetization for WhatsApp is a $0.99 annual charge that hardly any users actually pay. The first year of service is free, and users who downloaded the original iPhone app for $0.99 can receive free service indefinitely. In 2013, when the app surpassed 400 million active users, WhatsApp generated just over $10 million in revenue. In the first half of 2014, WhatsApp generated about $15 million.
Facebook isn't in a big hurry to monetize WhatsApp, but more of its users are based outside of the United States compared to Facebook and Facebook Messenger. In fact, that's part of the reason why Facebook purchased the company -- because it complements its existing user base well. Still, results from Facebook and other Internet advertising companies show that users outside of the U.S. are generally worth less than American users.
It's hard to imagine the monetization strategy for WhatsApp differing wildly from that of Messenger. As such, it's likely that Messenger users will be worth more than WhatsApp users.
What does this all mean for investors?
Facebook currently trades on the stock market with a market cap of roughly $250 billion. It purchased WhatsApp for about $22 billion in 2014, and it's safe to say WhatsApp's value has increased since the acquisition was announced. It has added 350 million net new users, along with several valuable features such as voice calling. Conservatively, WhatsApp accounts for at least 10% of Facebook's value, and Messenger accounts for more than that.
With at least one-fifth of the company's value (and probably more) derived from non-revenue-generating messaging apps, there's a bit of risk involved with Facebook. The good news is that other messaging apps have proven capable of producing significant revenue per user. WeChat, for example, generated an average of $7 per user in 2014, according to Nomura.
Facebook can afford to take losses on its messaging apps for now, funding them with ad revenue from the mothership. As long as both apps continue growing at their current paces, there's no reason to flip the switch on monetization before Facebook has excellent plans for both. If Facebook can monetize its Messenger and WhatsApp services at levels even close to that of WeChat, they'll generate more than enough revenue to justify their valuations.