$19 Billion For WhatsApp Could Be a Bargain

When Facebook’s (FB) Mark Zuckerberg negotiated the $1 billion deal for Instagram a couple years ago, he took about three days to pull it off. But as for his $19 billion purchase of WhatsApp – which is a top mobile messaging app — he actually took 11 days.

Kind of crazy, huh? Perhaps so. But when it comes to dominating the mobile world, a CEO needs to act quickly and pay big premiums. And yes, Zuckerberg has no problems with this.

But will the deal make sense? Will it drive FB stock? Well, we will probably not know until a few years. But given Facebook’s size, there is little choice but to make mega deals. It will probably be the only way to maintain the growth rate. If there is any deceleration – as seen with Twitter (TWTR) – the consequences can be severe on Wall Street.

So far, investors seem fine with the transaction. In today’s trading, FB stock is down only about 2%. The market cap is at a whopping $173 billion, making it one of the world’s most valuable companies.

When it comes to user growth, WhatsApp is certainly in the big leagues. During its first five years, it has outperformed Google’s (GOOG) Gmail, Twitter, Microsoft’s (MSFT) Skype and even Facebook.

Consider that WhatsApp is getting about 1 million signups a day (Twitter only got 9 million for the fourth quarter). Although, with the support of Facebook and the visibility from the mega deal, this is likely to accelerate. But even if the growth continues at the current rate, WhatsApp will hit 1 billion users within the next couple years.

If so, the company will be one of the world’s top mobile brands. In fact, it may mean that the $19 billion price tag was a bargain and could be a nice driver for FB stock!

Let’s see how: First of all, WhatsApp has a highly engaged user base as a whopping 72% launch the app every day. Anything over 20% is considered standout. Interestingly enough, Facebook’s percentage is about 62%.

If users are engaged, it is pretty easy to get them to pay money to keep using the app. There could also be opportunities to offer ad-ons like stickers, virtual items and ecommerce (such things have proven to be quite popular in Asia). Over time, the average user may be willing to spend a few bucks a year on WhatsApp – which could ring up lots of revenues on a 1+ billion user base.

But the revenues are likely to have margins that are off-the-charts. Keep in mind that the headcount at WhatsApp is about 55.  Oh, and the company spends zero dollars on marketing.

Now all this is not to imply that the WhatsApp deal will be a slam dunk. For the most part, WhatsApp has an opposite approach to Facebook’s. The service has no advertising and collects no personal information. Instead, the business relies on charging an annual 99 cent fee (this comes after the first year of usage). WhatsApps’ CEO and co-founder Jan Koum has the following note on his desk: “No Ads! No Games! No Gimmicks!”

Facebook, on the other hand, gets much of its money from advertising and has a huge trove of user information. So whenever there is this kind of dissonance with strategic approaches, a merger often results in much friction.

Then again, Zuckerberg has pledged that he will allow WhatsApp to remain independent. On the conference call, he said: “I don’t personally think ads are the right way to monetize messaging systems.”

Something else to consider:  WhatsApp could have problems keeping up the user growth. True, the app has been successful in markets like Europe, India and Latin. A key reason is that these countries have mobile carriers that charge exorbitant SMS fees. For the US market, it looks like Facebook’s Messenger service is a big player. But SnapChat may also be gaining ground, which helps to explain Zuckerberg’s $3 billion offer for the company.

Yet Asia could be a tough market to crack. There are already entrenched players like WeChat in China, Line in Japan, KakaoTalk in South Korea and Viber in the Middle East. Unseating these players will not be easy. Or, even worse, they may ultimately become a competitive threat in the US and Europe.

Despite all this, Facebook’s deal for WhatsApp does look spot-on. Zuckerberg has shown that he is serious about winning mobile. He has also made a bet on the fastest-growing property in the space. So if WhatsApp does become the global standard, there could be substantial monetization.