Facebook’s Astonishing Valuation of WhatsApp

WhatsAppFacebook just announced that they have purchased WhatsApp for 19 billion dollars. Yes, that’s 19 BILLION.

This must be the highest valuation for a company ever that I have never consciously heard of before. This is what WhatsApp does, based on their website:

WhatsApp Messenger is a cross-platform mobile messaging app which allows you to exchange messages without having to pay for SMS. WhatsApp Messenger is available for iPhone, BlackBerry, Android, Windows Phone and Nokia and yes, those phones can all message each other! Because WhatsApp Messenger uses the same internet data plan that you use for email and web browsing, there is no cost to message and stay in touch with your friends.

In addition to basic messaging WhatsApp users can create groups, send each other unlimited images, video and audio media messages.

I have used Viber, one of their competitors. It’s a good app for texting and free phone calls. When my son was overseas and didn’t have cell phone access, we used Viber to communicate, when he was in WiFi range. It cost nothing. We both just downloaded the app and off we went.

Looking at WhatsApp’s site, the main app, the text function, looks like an Apple iPhone messaging knock-off.

The company was founded only in 2009. Jan Koum, one of the cofounders, applied for jobs at Twitter and Facebook and didn’t get hired. They raised “only” 8 million dollars and now they have only 50 employees. Their app is free. They charge 99 cents per year for premium accounts. They seem to be more popular overseas than in the United States. Some of their installed base appears to be in India. They have 450 million users.

And there lies the secret: Facebook was not much interested in anything else but their user base, it seems. 450 million users is more than just about all other sites, except Facebook. This can certainly help cement Facebook’s power in the mobile space, and expand Facebook’s reach to more users, something they can’t just keep doing with their website after a certain saturation point.

If every one of their users were to pay the 99 cents annual fee (which will never happen), the company would have annual revenues of $450 million. This is not bad for a company with 50 people, not bad at all, but nowhere near justification for a 16 billion dollar valuation. Let’s put it into perspective with other companies and their market cap:

  • American Airlines: 12 billion
  • Harley Davidson: 14 billion
  • Nordstrom: 11 billion
  • Southwest Airlines: 14 billion
  • Xerox: 13 billion

This is naming just a few. These companies all have massive assets (airlines) and sell tangible goods or complex services,  and their valuations are all below WhatsApp.

Obviously, this is “bubble” value. WhatsApp is this valuable only to Facebook. Nobody else in the world would really know what to do with it.

However, the founders and employees of WhatsApp did a marvelous job to pull this off. I am impressed. Here was an interesting idea in an already fairly crowded market. They made a slick product for which there was a solid need, they focused on a very narrow mission, they kept their finances tight, and they built their user base.

Koum, one of the founders immigrated to the U.S. from the Ukraine as a child. The family made the early years work by relying on foodstamps. Koum is now a billionaire several times over.

Congrats to WhatsApp.

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