Making sense out of Facebook's acquisition of Whatsapp

Growth Story in numbers:

• 1.8 Billion users – Social messaging market by 2014 (Ovum forecasts)

• 7.6 Trillion messages - Operator based mobile messaging traffic in 2014

• 450 Million – Whatsapp users currently

• 3.5 Billion users – Global sms active users

• 1 Billion users – Whatsapp users forecast by 2014 year end.Whatsapp already has the same volume of texts as that of global sms volume.

• 40.8% - Premium messaging market growth rate.

• 38.3% - Mobile Advertising market growth rate

• $24.5 Billion – 2016 forecast for Mobile Ad revenue

• $3 Billion – Smart phone users forecast by 2018

• $120 Billion – Global sms revenue in 2013

• 53% - Mobile advertising share of Facebook’s revue

• 27% - CAGR  for Mobile Ad revenue

Just based on the above numbers, we can infer the monetization potential for Whatsapp.

But is Whatsapp worth $16 Billion?

Currently Whatsapp gets $1 (0.99 cents) per user after the first year.

Say 50% of the users have been using the app for more than a year that makes 225 Million paid users. So, they should have a revenue of $225 Million for 2013

The number of users is supposed to double to 1 Billion and so it will be making $450 Million for 2014 (overly optimistic assumption)

Now facebook gets about $7 billion in revenue and its market cap is $177 Billion.  Price to revenue ratio is 27. Let us reverse calculate what should be the revenue to justify $16Billion price tag.

It should be 16B/27 = $592 Million

So Facebook thinks Whatsapp is leaving (592-450) $142 Million as unrealized potential revenue for 2014.

Until now, nobody has been paying for Whatsapp. Until it is free it is growing but when users are asked to pay, they might flee.  Assuming, they will change the business model to ad based revenue, Let us do a simple valuation

50% of facebook revenue is coming from mobile ads.

Facebook active users =1.3 Billion

Mobile Ad rev/user = $2.7

Given that whatsapp is new to this model and given that whatsapp is not as big an asset as Facebook if we assume it can muster a $1 of mobile ad rev per user

Revenue estimate is $1 Billion for 2014 and $450 Million for 2013

Now using the Price to revenue ratio, Price =$450 Million*27=$12 Billion

This might have been the logic behind the pricing. Now facebook paid $4 Billion premium considering $12 Billion as a fair price which is a 30% premium.