Tags: Facebook | WhatsApp | sales | price

Facebook Confirms Stories Matter to Investors More Than Numbers Do

By    |   Wednesday, 26 Feb 2014 07:14 AM

Among the biggest stories in the stock market last week was Facebook's (FB) acquisition of WhatsApp for $19 billion, an amount that is more than the GDP of 86 of the 193 countries recognized by the United Nations.

Financial statements for WhatsApp are not publicly available, so there is no way to know how much the company earns. The texting app is reported to have 450 million users around the world. CNN noted that unlimited texting is widely available in the United States, but not in many overseas markets. The story leads readers to the conclusion that is why WhatsApp is so valuable. Users are paying for $0.99 for unlimited texting and saving money on their phone service.

Assuming all of the users pay for the app, Facebook paid more than 42 times potential sales for WhatsApp. By comparison, Facebook trades for 21 times sales, and the average stock in the S&P 500 index is priced at 1.5 times sales.

Clearly the fundamentals of this deal are not readily apparent to value investors. If the acquisition isn't based on fundamentals, it is based on a belief in growth or a story about how successful the combination of two overpriced companies will be in the future. The story depends upon a number of optimistic assumptions.

Analysts have been quick to point out that WhatsApp could have 1 billion users in a few years. If they are correct, and if all 1 billon pay $0.99 a year to use the app, Facebook still paid an amount equal to about 19 times sales. That is more than 12 times the average valuation for a large cap company in the S&P 500 with a proven business model. Growth deserves a premium in the market, but this price seems high by any reasonable standard.

Time will tell whether or not Facebook overpaid for WhatsApp, but the important point to remember is that a widely believed story can be more important in the short term than fundamentals are.

© 2017 Newsmax Finance. All rights reserved.

 
1Like our page
2Share
MichaelCarr
Among the biggest stories in the stock market last week was Facebook's (FB) acquisition of WhatsApp for $19 billion, an amount that is more than the GDP of 86 of the 193 countries recognized by the United Nations.
Facebook,WhatsApp,sales,price
332
2014-14-26
Wednesday, 26 Feb 2014 07:14 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved