This page has been archived and commenting is disabled.

An App for Your Country?

Freaking Heck's picture




 

By: Chris Tell at http://capitalistexploits.at/

The world's gone "tech crazy" once again. ZeroHedge.com recently ran a great article showing the buying spree in the new "Dotcoms."

I've nicked the graphic they used in the article, which so eloquently shows the timeline in the current round of acquisitions:

whatsapp bubble


In the spirit of educating myself about the apparent bubble in the social media and app spaces, I figured I'd take a closer look at Whatsapp. My first impressions seemed to indicate that Facebook's Zuckerberg must have been dropped on his head as a child, and the rest of the Facebook management team is just fast asleep or partaking in some very good drugs.

Let's first revisit the sale. $4B in cash, $12B in Facebook shares and $3B more in restricted shares. I've been involved in dozens of private equity transactions, reviewed hundreds, perhaps thousands more. You stop counting at some point. Some things just jump out at you after a while, and looking at this closer some things are clearly evident.

First up, $4B cash and effectively $15B in stock...

  1. Facebook must believe their stock is overvalued. You use stock to purchase when your stock is pricey. You use cash to purchase when your stock is cheap. What we have here is the flipside of buying back stock.
  2. The $3B in restricted stock. This is smart because once again the valuation is pretty rich at a P/E of 103.
  3. The low cash payment. This too makes sense when you realise that earnings are not stellar, certainly compared to valuation. It's like having a $2M pool of assets which throw off such a tiny yield that you're actually struggling to make ends meet, but your balance sheet says you're wealthy. I know quite a few guys like this in the real estate space.

Digging a little further than just the headline, let's try figure out whether Whatsapp is actually a good business.

They have 450 million users and they add a whopping 1 million new users every day. Impressive! At this rate it's not hard to imagine them reaching a billion.

OK, so user growth is rampant, next let's see what sort of OPEX is required to support, or “onboard” these users.  They have just 32 engineers for the 450 million current users. That's over 14 million users per engineer. Yikes. Once again, very impressive.

The business model is to charge $1 annually. From a user's perspective this is a bargain, as it will save them a ton of money on texting.  I don't know what the average user currently spends annually with his phone provider's text plan, but I'll take a guess it's closer to $100 than $1. In fact, Mark was recently in a mobile providers store in Auckland and the sales guy was telling a new customer to forget texting, "just use Whatsapp."

OK, I get the value proposition. Their marketing seems very simple. I like simple. There are no ads, no popups, no games. Very clean. What you see is what you get. Great, love it. As a user I don't get annoying advertising interrupting my experience.

So what are the user acquisition costs? Apparently their user growth has been all by referral. Zero, zilch zippo money spent on user acquisition. This epitomizes viral. On this front they've clearly nailed it.

But what hits the bottom line is what matters right? Net profit margin is currently 50%. This is very, very competitive. Google and Facebook for example run about 20% net. We can see that this is because they are sticking to one solid business line and their cost of maintaining their clients is fractional.

The Valuation Metrics


Lets try and value this business on a Price to Earnings basis.

  • Current P/E  = $19B/225m (450m x 0.5) = 84x
  • If they hit 1 billion users and suffer no substantial changes to their profit margins, then a forward P/E would be $19B/500m = 38x

That doesn't seem too bad a multiple compared to Facebooks PE of 103x, but then given that Facebook is far from cheap I'm not too excited.

How about their price per user acquisition/client.

  • At $19B for 450 million users we get to $42 per user
  • On a forward basis assuming they get to 1 billion users we get $19B/1B which of course is $19 per user.

One way to look at this is to say, "OK, how long for me to recoup my capital from each user?" Well, it's either 42 or 19 years. What pray tell does the tech industry look like in 42 or even 19 years? I don't pretend to know, but the odds are Whatsapp won't even be around. Sorry, it makes no sense to me.

What about the Price to Sales Ratio?

  • This of course mimics the above calculation simply because revenue per client is $1.
  • Price to sales of 42x or even 19x is just loopy in my opinion. Where is the upside?

In this insane world of QE and rate suppression revenues and profits no longer seem to matter. I see it in the real estate markets all around the world and in many public equity markets.

Asset valuations should always be a reflection of revenues in the same way that a person's income should be the driver behind the price of their home. This is no longer the case. Thank you "Uncle Ben" (and now Janet Yellen), thank you Mario Draghi, thank you Haruhiko Koruda and all those who follow in your paths.

CSE

The photo above was taken two weeks ago at the Colombo Stock Exchange in Sri Lanka, where the total market cap of all listed companies is a mere $20 billion USD. Now I ask you, which would you rather own? One of the fastest growing countries in the world with one of the best-performing stock markets on the planet over the last decade? Or, an overvalued (by its own actions) social media company investing in an "App" that is likely to become obsolete overnight?

Short Facebook, long Sri Lanka? I could think of worse trades.

- Chris

"Can we go back to using Facebook for what it was originally for - looking up exes to see how fat they got?”  - Bill Maher

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 04/02/2014 - 16:44 | 4618644 X_mloclaM
X_mloclaM's picture

100 cell bill / 3 would even be a very generous manner of calculting the value of texting to a user

So if texting were "worth" 1/3 of the service provided, with Internet, and digital to PSTN connectivity (phone calls) as the other 1/3s, it cuts very close to a claim that $33 is closer to $100 than $1 ....

Chris, really a pathetic portion of the analysis there... though the truth supports your case even harder...

Wed, 04/02/2014 - 16:34 | 4618626 theprofromdover
theprofromdover's picture

I just read their website.You can pay for all your kids, soccer team, t@rrorist cell, and cookie club if you want, and for 10 years at a time. 

There's a lot of money coming into their accounts in the next year or so til they tie up all 7 billion of us; then what.

I think Facebook had to pay all these billions for the owners' souls. I don't think they wanted to sell, or needed to sell more than 5% tops.

Wed, 04/02/2014 - 16:25 | 4618593 theprofromdover
theprofromdover's picture

Beats me. I would have thought I was exactly the kind of guy all these monsters think they can get money off. Me and my gal nearly free of kids, worked hard, got somewhere, cleared most of our debts, might even has disposable income if I stop buying gold and property (all right, stop thinking about buying property).

So does someone like me pay for any of their products? An Android phone, that's it. I don't buy from ads, the advertisers pay for me looking.

This is a mighty bubble, but I would probably pay $20 a year for unlimited texts, but if WhatsApp keeps growing, my phone provider is gonna have to give me them for free to hold my business soon anyways.

Wed, 04/02/2014 - 12:37 | 4617657 Billy Sol Estes
Billy Sol Estes's picture

Desperation.

Look at the success GE has had from switching from making washing machines to making Defense hardware and E&P.

Maybe Facebook will start drilling for oil too!

 

Wed, 04/02/2014 - 10:00 | 4617076 Stuck on Zero
Stuck on Zero's picture

I once co-founded a hi-tech company during the dotcom era.  We went public very early and our stock rose to ridiculous valuations.  We had no sales and were a year or two from production.  We were low on cash.  We had no choice but to go on a buying spree with our stock to get value for our shareholders.  Same with all the other dot-commers.  It's happening again.

 

Wed, 04/02/2014 - 09:42 | 4616995 thorgodofthunder
thorgodofthunder's picture

Since the worst deal of the century Facebook is down about 15%. How far will it fall?

Wed, 04/02/2014 - 08:16 | 4616633 medium giraffe
medium giraffe's picture

Although dated, I think Graham's value investing is a great approach for the individual.  Without looking at total assets and trying to understand the worst case scenario (i.e, return from liquidated assets), how can a risk profile be determined?  Without a risk profile, risk is open ended, potentially 100%.  Not a smart way to protect capital.

Look at the worst case scenario for WhatsApp.  The figures are impressive, but having only 32 engineers is revealing.  Some of them are probably software engineers, leaving very few to administer the network.  This certainly means hosted services, a handful of servers in a few data-centers, providing a good discount vs. total cost of ownership.

So WhatsApp probably rent servers, rent networks and rent furnished offices.  During a fire sale, they have nothing to sell.  You get $0 per share.  The lessons of the '99 tech bubble have still not been learned.

 

 

Wed, 04/02/2014 - 08:15 | 4616626 rustymason
rustymason's picture

Heiliger Bimbam, a useful article. What is happening around here?

Do NOT follow this link or you will be banned from the site!