It sure feels like a watershed moment.
Facebook bought the messaging service WhatsApp yesterday for $19 billion in cash and stock. Put another way, a company valued at 100 times earnings is buying a company valued at 950 times sales.
Needless to say, it calls for some skeptical press coverage.
We got it from The New York Times, which went heavily skeptical in its news story (emphasis mine):
The frenzy to acquire fast-growing technology start-ups reached new heights on Wednesday as Facebook announced its largest acquisition ever, saying it would pay at least $16 billion for WhatsApp, a text messaging application with 450 million users around the world who pay little or no money for it.
The eye-popping price signals the lengths to which Facebook’s co-founder and chief executive, Mark Zuckerberg, will go to protect his company’s turf as the dominant social network on the web, and is sure to fuel the debate on whether consumer Internet companies are overvalued.
In case you missed the point, the Times hammers it home in the fourth paragraph, “By any measure, Facebook is paying a steep price for a service that is widely used internationally but is less known in the United States.”
We didn’t get skepticism from the Washington Post, which somehow doesn’t mention anything about how eye-watering the price tag is.
VentureBeat, on the other hand, writes this:
“Facebook has a growth problem: It’s running out of room. So it’s shelling out $16 a head for its next billion users…
That’s its next billion, and the next billion is priceless.”
A good part of a bubble’s self-reinforcing logic comes when you start comparing speculatively valued companies against other speculatively valued companies. Yahoo’s Aaron Pressman, for instance, writes this:
But while the price tag is drawing sneers, it’s not so far off the mark – WhatsApp has grown faster and has a larger active user base than Twitter (TWTR), now worth $30 billion.
Twitter has never posted a profit and trades for a whopping 45 times last year’s sales. Twitter is worth $30 billion, ergo WhatsApp is worth $19 billion? Next it will be WhatsApp is worth $19 billion, so Company.ly or whatever must be worth $XX billion. And so on.
I was about to write that while some, like Felix Salmon, are justifying the sky-high valuation, not unreasonably, as a defensive play for Facebook, nobody is saying it’s cheap.
Leave it to Henry Blodget’s Business Insider to do that.
The Chart That Shows WhatsApp Was A Bargain At $19 Billion
Facebook paid $42 per user for WhatsApp when Facebook itself is valued at $141 per user. Never mind the fact that Facebook trades at a P/E of 107, LinkedIn is at 882, and Twitter is at N/A because it still loses piles of money. At Facebook’s user multiple, WhatsApp would have gone for a mere $63 billion (Beyond the fact that Blodget, God love him, was one of the most prominent cheerleaders of the dot.com bubble, I’d note that Business Insider itself benefits from increasing valuations).
When I see people like Felix saying things like, “If you’re asking whether Zuckerberg paid too much for WhatsApp, you’re asking the wrong question,” I get nervous.
But then again, I was nervous three years ago—and social-media valuations have only soared since then. You can’t time these things, and sometimes speculators are actually right.
It’s also critical to point out that Facebook is buying WhatsApp with $4 billion in cash and $15 billion in Facebook’s richly valued stock. If Facebook shares fall, the value of this deal will fall with it. If they continue to soar—right now FB is valued at $170 billion—Zuckerberg and Co. will have ended up spending far more than $19 billion for WhatsApp.
And sure, things might be different this time. WhatsApp actually is likely to be highly profitable someday not too far into the future. But how profitable, and is its popularity ephemeral? Is it a $19 billion business model? WhatsApp is a pay product with no ads. Users get the first year free and then pay just a dollar a year after that, which is, quite frankly, a brilliant business model (and I love their anti-advertising, anti-data-harvesting stance, though selling out to Facebook is problematic on both counts).
But it’s as yet unproven. Very few of its users have paid yet, and WhatsApp already has plenty of free competitors like Viber, which, oh by the way, got bought last week for “just” $900 million.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.