The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Anyone who knows me well is aware of how much I hate Facebook as a service. I just don't get it. Too much work. Too time-consuming. TMI as the kids who apparently aren't on Facebook as much as they used to be might say.
But Facebook (FB) as an investment? That's an entirely different story.
Once you get past the mouth hitting the floor, eyeballs popping out of your head (but rest assured those eyeballs will be monetized!) valuation of $19 billion that Facebook is paying for messaging service WhatsApp, you can't deny the following fact: Mark Zuckerberg is one shrewd dude.
Facebook, in one fell swoop, is adding a service with 450 million users. Sure, there has to be some overlap between Facebook's more than 1 billion user base and WhatsApp users. But think of it this way. Facebook never had a messaging service that people truly loved. Now it does.
And history has shown that Zuckerberg and Co. know when to leave well enough alone. They could have easily turned Instagram, which Facebook acquired for a 'mere' $1 billion in 2012 just before its IPO, into Facebook Photos. They didn't.
It's also telling that Instagram CEO and co-founder Kevin Systrom is still running Instagram. He didn't take his Zuck bucks to go create another start-up.
Instagram may now be selling ads. But that apparently hasn't ticked off fans of the service that much. Instagram now has 150 million active users. When the company agreed to sell itself to Facebook in April 2012, it had around 30 million users.
If Facebook keeps WhatsApp as a separate entity, then it's possible that very little may change for users. And considering that WhatsApp CEO Jan Koum is getting a Facebook board seat, one can argue that his vision may help shape future Facebook products as well. (As a quick aside, I wonder if Facebook should also name Systrom to the board?)
It really looks like Facebook has learned some good lessons from the likes of Amazon.com (AMZN) and Google (GOOG). Both companies bought popular sites with fanatical user bases ... Zappos for Amazon and YouTube for Google ... and didn't do that much to change them.
It's the proverbial case of not needing to fix what ain't broke.
WhatsApp also fits in nicely with Facebook because WhatsApp actually generates revenue through the modest $1 annual fee it charges users after the first year. That will help Facebook diversify beyond advertising. In 2013, Facebook generated about $886 million in sales from payments and other fees. That's just 11% of its total revenue. But that number will undoubtedly grow with WhatsApp in the fold.
The acquisition is also a back door way for Facebook to get into China and expand further in other hot markets in Asia. It's not clear how many users WhatsApp has in China. But the app is not blocked there. Facebook is.
Still, WhatsApp -- and by extension Facebook -- has a ways to go before it can catch up with other big social media and messaging firms in China. WeChat, owned by Chinese Internet conglomerate Tencent, dominates the messaging market in China. It is, to pull a Stephen Colbert-ism, a formidable opponent.
WhatsApp and Facebook will also have to contend with Sina (SINA), which owns Chinese Twitter equivalent Weibo. And moving elsewhere in the Asia-Pacific region, Japan's Line is another major player in messaging.
But the point is that Facebook now has a fighting chance to make some waves in China. That wasn't the case as recently as yesterday.
Finally, you have to respect the killer instinct of Zuckerberg.
Buying WhatsApp could put a lot of pressure on Snapchat and other messaging services in the U.S. Does Snapchat, which reportedly rebuffed a $3 billion takeover offer from Facebook last year, now have to go running to the arms of Twitter, Google or dare I even say it, Microsoft (MSFT)? SnapSkype, anyone?
I still won't be updating my status on my Facebook page -- which is as barren a place as ... say in your best NFL Films voice ... the frozen tundra of Lambeau Field -- that often. And I doubt you'll be seeing me sharing photos on Instagram or chatting on WhatsApp. I still prefer Twitter. (But only on weekdays while in the office, thank you very much.)
But I get why Facebook coveted WhatsApp so much that they were willing to pay through the nose for it. And the market is relatively happy too. Facebook shares were actually up slightly Thursday afternoon.
That's not that big of a drop -- especially when you consider that Facebook hit an all-time high yesterday.
Facebook stock is no bargain. Shares trade at 54 times 2014 earnings estimates. But that current estimate is probably too low. Analysts have been raising their projections over the past few months and that trend likely isn't over.
Plus, Facebook is expected to post profit increases of more than 30% a year, on average, for the next few years. So you can argue that the stock is not absurdly overvalued given its growth potential.
And as long as Zuckerberg doesn't mess up WhatsApp, then Facebook deserves a premium valuation. Zuckerberg is quickly proving that he can be as effective a CEO as Google's Larry Page and Amazon's Jeff Bezos. It's hard to put a price tag on smart leadership.
Reader Comment of the Week: I waxed nostalgic on Twitter this past Presidents Day. There was little else to do with the market closed. So I dug up a story I co-wrote on Presidents Day 2007 (when I was supposed to be off!) after Sirius and XM announced their merger. My co-conspirator chimed in with a gripe about former Sirius XM (SIRI) CEO Mel Karmazin.
Well-played, Dave. Now where's that bottle of Bushmills? And Mel Karmazin for that matter?
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