## Thursday, February 20, 2014

The Investor/Value View
I will start wearing my value cap, mostly because I feel more comfortable in it and partly because I understand it better. Looking for fundamentals to justify the price paid but I realized very quickly that this would not only be futile but frustrating and here is why. To justify a \$19 billion value for a company in equity markets today, you would need that company to generate about \$1.5 billion in after-tax income in steady state.
Value of equity = \$19 billion
Implied required return on equity, given how stocks were priced on 1/1/14 = 8.00% (a 5% equity risk premium on top of a 3% risk free rate)
Steady state earnings necessary to justify value = \$ 19 billion *.08 = \$1.52 billion
Steady state pre-tax earnings needed to justify value, using an effective tax rate of 30%= \$1.52 billion/(1-.30) = \$2.17 billion
That would translate into pre-tax income of about \$2.2 billion and it is a lowball estimate of break even earnings, since the break even number will increase, the longer you have to wait for steady state and the more risk there is in the business model. Using a 10% required return (reflecting the higher risk) and building in a waiting period of 5 years before the income gets delivered increases the break-even income to \$4.371 billion. You can try the spreadsheet with your inputs, if you so desire, to see what your break-even earnings estimate will be.

There are three pathways to delivering these break-even earnings:
1. If the company continues its current business model of allowing people to try the app for free in the first year and charge them a dollar a year after that (99 cents) and has zero operating costs (completely unrealistic, I know), you would need about 2.5 billion people using the app on a continuing basis.
2. It is possible that the app is so good that you could charge more per year and not lose customer. At their existing user base of 450 million, that would translate into about \$5/year  per user, if you have no costs, and more, if you have costs (which you clearly will).
3. The value may be in the form of advertising revenues from Whatsapp’s users but that will be tricky. On the home page for the app, here is what the app’s developers say about advertising:

While they may not be legally bound by this statement, it will be awkward to walk it back and start sending text ads. However, there is a back door that Facebook may be able to user, if they can draw Whatsapp’s users (who tend to be younger) into the Facebook ecosystem and advertise to them there. Whatever the model, though, you would still have to generate at least \$2.2 billion in after-tax income from advertising to Whatsapp users to break even.

As an investor, the fact that a significant portion of Whatsapp's customer is teenagers is terrifying as a business proposition. While it is unfair to generalize based on anecdotal evidence, as the father of four children, two of whom used to be teenagers and two of whom are in the full throes of the disease (with symptoms ranging from extreme self-centeredness to volatile mood swings), it seems to me that the only group that is less dependable (and predictable) than teenagers is a group of teenagers who text a lot.

At this stage, if you are an investor, you have two choices. The first and less damaging one is to accept that social media investing is not your game and move on to other parts of the market, where you can find investments that you can justify with fundamentals. The second is to go from frustration (at being unable to explain the price) to righteous anger or indignation about bubbles, irrationality and short term traders to trading on that anger (selling short). I would strongly recommend that you not go down this path, since it will not only be damaging to your physical health (it is a sure fire way to ulcers and heart attacks) but it may be even more so for your financial health. While you may be right about the value in the long term, the pricing process rules in the near term.

Wearing my trading hat, though, the Facebook acquisition for Whatsapp may not only make complete sense, but it may actually be viewed as a positive. To understand why, I had to change my mindset from thinking about fundamentals (earnings/cashflows, growth and risk) to focusing on what the market is basing its price on. To find that “pricing” variable, I looked at the market prices of social media company, multiple measures of their success/activity and tried to back out the drivers of both price differences and price movements.

These companies have different business models and may even be in different businesses but remember that the pricing game may not be about what you and I (as investors) think makes sense but what traders care about. Though the two (what makes sense and what markets focus on) may sometimes converge, they don’t have to, at least for the moment. My simplistic attempt at making sense of market prices was to look at the correlation between the market's assessment of corporate values and each of the measures for which I had data:

Based on this correlation matrix, here are the conclusions I would draw:
1. Number of users is the dominant driver: The key variable in explaining differences in value across companies is the number of users. While the value side of you may be telling you that you cannot pay dividends or buy back stock with users (you need cash flows), remember that the pricing game is not about what you or I think makes sense but what traders care about. This is reinforced by market reactions to earnings announcements, with Zillow seeing its stock price climb 12% when it reported earnings on February 14, 2014, primarily on the news that they added more users than expected and Twitter seeing its stock price drop 25% last week, again primarily on news that the user base grew less than expected.
2. User engagement matters: The value per user increases with user engagement. Put different, social media companies that have users who stay on their sites longer are worth more than companies where users don’t spend as much time. While making comparisons across companies is difficult, since each company often has its own "measure" of engagement, there is evidence that markets care about this statistic. For instance, another reason Twitter was punished after its last report was that investors believed that the "timeline views per average user" and the "revenues per 1000 timeline views" reported the company were lower than they had anticipated.
3. Predictable revenues are priced higher than more diffuse revenues: Some of the companies on this list derive revenues entirely from advertising, some from a mix of advertising and subscriptions and some from just subscriptions. In fact, some like Zynga make their revenues from retailing (in game purchases). While the sample is too small to draw strong conclusions, the value per user of \$577 attached to Netflix's users suggests that the market values predictable subscription revenues more than uncertain advertising or retail revenue.
4. Making money is a secondary concern (at least for the moment): Markets (and investors) are not completely off kilter. There is a correlation between how much a company generates in revenues and its value, and even one between how much money it makes (EBITDA, net income) and value. However, they are less related to value than the number of users.
So, what's next?
Following in the footsteps of my favorite baseball general manager, Billy Beane, its time to play some Moneyball, where we let the data drive our actions, rather than our intellects. Here is what I take out of these numbers:
1.  If you are an investor, stop trying to explain price movements on social media companies, using traditional metrics – revenues, operating margins and risk. You will only drive yourself into a frenzy. More important, don’t assume that your rational analysis will determine where the price is going next and act on it and trade on that assumption. In other words, don’t sell short, expecting market vindication for your valuation skills. It won’t come in the short term, may not come in the long term and you may be bankrupt before you are right.
2. If you are a trader, play the pricing game and stop deluding yourself into believing that this is about fundamentals. Rather than tell me stories about future earnings at Facebook/Twitter/Linkedin, make your buy/sell recommendation based on the number of users and their intensity, since that it what investors are pricing in right now.
3. If you are a company and you want to play the pricing game, I think that the key is to find that "pricing variable" that matters and try to deliver the best results you can on that variable.
Returning to the Facebook/Whatsapp deal, it seems to me that Facebook is playing the pricing game, and that recognizing that this is a market that rewards you for having a greater number of more involved users, they have gone after a company (Whatsapp) that delivers on both dimensions. Here is a very simplistic way to see how the deal can play out. Facebook is currently being valued at \$170 billion, at about \$130/user, given their existing user base of 1.25 billion. If the Whatsapp acquisition increases that user base by 160 million (I know that Whatsapp has 450 million users, but since its revenue options are limited as a standalone app, the value proposition here is in incremental Facebook users), and the market continues to price each user at \$130, you will generate an increase in market value of \$20.8 billion, higher than the price paid. Are there lots of "ifs" in this deal? Sure, but it does simplify the explanation.

Are there dangers in this deal? Of course! First, it is possible (and perhaps even probable) that the market is over estimating the value of users at social media companies across the board. However, Facebook has buffered the blowback from this problem by paying for the bulk of the deal with its own shares. Thus, if it turns out that a year or two from now that reality brings social media companies back down to earth, Facebook would have overpaid for Whatsapp but the shares it used on the overpayment were also over priced. Second, as social media companies move up the life cycle, the variable(s) that even traders user to price companies will change from number of users/user intensity to revenues, earnings and cash flows. When that happens, there will be a repricing of social media companies, with those that were most successful in turning users into revenues/earnings being priced higher. This, after all, is what happened in an earlier iteration with dot com companies that went from being priced based on website visitors (analogous to number of users) to being priced based on how long those visitors looked at your website (paralleling user intensity) to how much they generated in revenues before settling into earnings. The problem for companies (and investors) is that these transitions happen unpredictably and that markets can shift abruptly from focusing on one variable to another. For Facebook, the path to success with this deal is therefore simple, albeit not easy. Start by trying to attract Whatsapp users to the Facebook ecosystem, and hope and pray that the market's focus stays on the number of users for the near term. Follow up by trying to monetize these users, with advertising revenue being the obvious front end but perhaps other sources as well.

Closing Thoughts
My experience with markets has been that no one has a monopoly on virtue and good sense and that the hubris that leads to absolute conviction is an invitation for a market take-down. To investors who view deals like the Whatsapp acquisition as evidence of irrational exuberance, remember that there are traders who are laughing their way to the bank, with the profits that they have collected from their social media investments. Similarly, for traders who view fundamentals and valuation as games played by eggheads and academics,  recognize that mood and momentum may be the dominant factors driving social media companies right now, but markets are fickle and fundamentals will matter (sooner or later).

1. I wish all financial writing was like this - thank you. Excellent piece.

2. isn't it 2.5 billion people (not 2.5 trillion)who have to continuallt use the app?

3. While I agree with the obviously true conclusion, I'm not sure how you drew the conclusion "user engagement matters" given that none of the metrics used measure user engagement.

Small point, but it bothered me while reading.

4. Fantastic post.

But on the value side of the equation, I would think the required equity return should be a LOT higher than the 8% broad market return. Bumping 8% up to 10% seems like small premium for a stream of cash flows with so much risk. A 20% required return seems more like a fair ballpark to me.

5. If only some other companies could convince the Street to start valuing them based on 'users'. How many people in the world use Google? Slap a \$130/user valuation on. I am sure even YHOO has some engaged users.

Why stop there? Wal-Mart has a lot of 'engaged users' too. They're just called customers because they actually make money off of them.

6. One other point re: the value equation. They have basically no cost at this point...but from a customer service / back office standpoint if a minimum wage employee had to spend 10 minutes a year / per customer once they charge money for their services -- that would eat into 40% of a \$5/yr revenue stream.

7. I appreciate your contrast between traders and investors, but is it appropriate to view Facebook in that context? It's not like they're going to flip WhatsApp three months (or three minutes) from the time of purchase. It is foolish for corporations to think about acquisitions in any terms other than the free cash flow they expect to generate from the acquisition.

8. You didn't consider information that
- One million new users register every day.
Even if consider retention rate near 50%, after year 1 WhatsApp should has 450+((1user*365days)/0.5)= 632.5 million users.
So necessary time to break even could change significantly. Of course, question here more to playing with numbers...

9. another possibility is that FB might also try to adopt WS' proven paid model to FB's other value-added services (no ads, career connection ... etc). if so FB could generate significant revenue to justify its acquisition of WS.

10. Great article, thanks! I don't understand one figure - how did you arrive at 160 million as the (possible) number of incremental FB users?

11. Great article, thanks! I don't understand one figure - how did you arrive at 160 million as the (possible) number of incremental FB users?

12. Great piece! It did induce a split personality in me!

13. Pretty clear he "goal seeked" that 160mill number to make a point.
But the larger point is- are there any new users? Is there anyone who uses Whatsapp but doesn't have a facebook account? Is this a significant number? If not, all this means is Facebook is "re-buying" their users. Kind of like maintenance capex if you ask me. I think FB understands they have no moat and have to keep buying their users to maintain their advertising revenue stream.

14. Interesting. I don't think you quite capture what is driving the traders.

What problem do the Traders solve?

Though you do indirectly state the problem they solve: How do you value a company whose earnings are far in the future? You don't center your argument on that. I think the answer links Traders and Investors - in your story and in practice.

We can tell any story we like about what WhatsApp's future earnings - almost anything is plausible from 0 to several billion in 5-10 years.
Traditional investors aren't willing to deal with the uncertainty.
Traders are willing to - up to a point. They use the best thing available as clues to what may happen. WhatsApp has some value, and it will have some future earnings. Rather than wildly telling any story, it is actually a cautioning measure to rely on the few things that are known to anchor estimates of what may unfold in the future.

In reality this is the same thing investors do. Companies are not valued because of the earnings they have had, but because of the earnings they will have. Using current fundamentals to guess what future earnings will be is exactly the same process that traders using users use. the difference is that the confidence intervals have a different shape and a very different term structure.

15. Since the WhatsApp users are teenagers they are also likely to already have a FB account. Therefore, the number of new FB users may be closer to zero than the required 160 million needed to justify the traders numbers... ouch!

16. As others have noted, there is almost definitely an overlap between FB users and WhatsApp users. Anecdotally, everyone I know who uses FB, also uses WhatsApp. They just use the two services for different reasons. So even if you are a trader, you cannot justify the price based on users, as then FB is simply paying itself for its own users, which would be ludicrous. Personally, I think FB is just paying \$19 billion because it can, and there is nothing to justify it. I mean why did they choose \$19 billion? Why not \$22 billion? Perhaps they chose the number based on how many chocolate strawberries they ate at their supposed deal dinner, with each strawberry worth \$1 billion. One thing I am fairly certain of, Zuckerberg is surely laughing at all of Wall Street for helping him print this kind of absurd money at will and justifying it.

17. Dan,
Interesting point about traders but I don't buy the story. It is true that a subset of investors, the old time value investor school, will not be drawn into buying shares in any growth or risky company. However, there are growth investors (Peter Lynch, for instance) who do value risky companies and invest in them.
In fact, traders go wherever there is action. Thus, if there is action in Coca Cola, they will be there as well.

18. Interesting post, wish you'd written this before though, as I may have taken a different path. I am now short in large size Tesla/Facebook/3D Systems as well as the Russell 2000. I cant reasonably get out of the trades now (in illiquid options), if there isn't a dramatic fall between May and year end my net worth will have dropped from relatively considerable to close to 0. Think I might be putting serious strain on my heart (at age 32) .. no joke.

19. Interesting and good

20. That's really good, now a user can operate both the things at same time, if you ant to update status on Facebook, you can update it through Whats app also.

21. I think traders' point of view and their laughing away to the bank is just about the greater fool theory. Your analysis about cash flows and risk, and break-even is correct. But you too as an investor would agree that this kind of speculation (yes it is that) is not going to last for long. All bubbles are going to burst, sooner than later. History is backing up for that. For a no income model business any price is speculative, \$19 B is a joke. Unless of course there is a plan to monetize 450 M users and continue to increase user base. FB better explain the rationale rather than talking only about users. The only consolation is \$15 B paid in overpriced speculative stock. Yet, what about that \$4 B cash, isn't that too much for a zero-earnings business? For us it indeed will be interesting to see how all this unfolds in future, let's watch that space for the fun-ride.

22. How did you get the EV of those companies in that table? For e.g why does NETFLIX have a EV = it's market cap but other's don't?

23. I think it should be free cash flows of \$1.52 B that are required to get \$19 B value rather than earnings. Is it that you consider in perpetual state depreciation would equal reinvestment so that earnings = FCFF?

24. Sorry it should be FCFE.

I think it should be free cash flows of \$1.52 B that are required to get \$19 B value rather than earnings. Is it that you consider in perpetual state depreciation would equal reinvestment so that earnings = FCFE?

25. Aswath,

26. This comment has been removed by the author.

27. Thanks for this analysis and I think this is a very useful way of thinking about this value / price discrepancy.

1. It is alright not to make a moral judgement on traders vs investors. However, Facebook is not a trader and should it be drawn into the trader's game of valuing a company that it wants to acquire in this way with little correlation with fundamentals?

2. I admit that some of the risk above is mitigated by paying in shares as FB is being valued on the same metrics. However, the value of attracting whatsapp users to facebook, i.e. "synergies" is something that is relatively risky and unknown. I would think that your back of the envelope shows that FB needs to attract 160m whatsapp users who are already not using facebook. I dont have the numbers on how many users of whatsapp dont use facebook but I would think there is some overlap already. Which means that this is by no means an easy task. Further, it is also not clear how this will be done if whatsapp continues to function as an independent service.

3. Assuming that the synergy value can be justified by \$130 x expected new facebook users, hasn't facebook already paid away largely all of this value?

4. I would argue that the balance of upside / downside is very skewed here against the existing shareholders of FB even if you leave aside fundamental valuation principles and continue to use the \$130 pricing metric. If FB can achieve the very difficult task of attracting 160m new users, the existing shareholders will be no better off (or maybe marginally better off depending on what the actual numbers turn out to be). However, the downside if FB is not able to achieve this is much more material.

5. This may not have been acceptable to Whatsapp shareholders, but I would have thought that a better way to structure this deal would have been to link the number of shares to be paid to the number of additional users generated. I am not sure if there is way for them to measure this. However, if this is possible then the value of these synergies is paid as and when they are realised. This method would continue to use the trader / pricing view of the world but ensure that existing shareholders are getting a fair deal.

NA

28. To EA..
User engagement can be measured by number of active users in a day..(can be a start of measuring user engagement)

29. Last year it bought Snapchat , now WhatsApp , What Facebook is trying to do… Is Facebook the future of Cloud based messaging?

1. Well .. its easier interpreted than that, its trying to do to the P2P messaging industry what M\$ tried to do to browsers a decade or so ago.

30. Dear Aswath Damodaran, Thanks for writing this excellent piece. However I think it is great that Facebook is bold and buying other companies to continuously grow.

On the other hand we have companies like Apple who have resorted to share buyback as increasing the value of company. I recently wrote an article on what I think of Carl Icahn's strategy for apple. http://www.baboonbiz.com/why-carl-icahns-strategy-of-asking-apple-to-buy-back-stock-is-wrong/

31. Are you serious.you are brilliant and I know you know that.

32. Amazing musing....

33. The article was a great read.

What I personally felt Mark would have factored in the pricing, was a threat by Whatsapp to FB's very existence. He himself has wiped out Orkut and knows that FB's existence is always under threat. Whatsapp was (gradually to begin with and now) rapidly adding features to a plain texting platform. Group features, sharing photos & videos, etc. was infringing on the social media landscape, plus the buzzword - privacy was a strong USP. Add to that the trend of mobility, which is whatsapp's bigger forte than of FB's.

So, to me, the high price FB has paid could be to ensure whatsapp never kills FB!

34. From Facebook perspective, this is a very good move as FB can earn from it. But from our perspective, we don't want Facebook to ruin the app. This is one of the biggest deal in technology market.

35. Facebook's purchase of messaging service WhatsApp for up to \$19 billion in cash and stock is one of the largest acquisitions ever in the technology sector.

36. Great article. Maybe a large % of Whatsapp users are already using FB. And given the takeover news probably a large bunch of FB users also join Whatsapp. That way there is no easy way to get the unique user base.

37. Great news validating real time / OTT communication market and it being disrupted with new technology. No need to be a Cisco / Microsoft / AT&T to build powerful social / business communication technology anymore. There is a number of emerging platforms such as QuickBlox http://quickblox.com/, Twilio, TokBox etc enabling you to build functionality such as WhatsApp / Viber / Skype / FaceTime literally in days. We shall expect to see more success stories from the likes of WhatsApp.

38. Great news validating real time / OTT communication market and it being disrupted with new technology. No need to be a Cisco / Microsoft / AT&T to build powerful social / business communication technology anymore. There is a number of emerging platforms such as QuickBlox http://quickblox.com/, Twilio, TokBox etc enabling you to build functionality such as WhatsApp / Viber / Skype / FaceTime literally in days. We shall expect to see more success stories from the likes of WhatsApp.

39. But now you have changed the definition:
"In fact, traders go wherever there is action. Thus, if there is action in Coca Cola, they will be there as well."

If this is what you mean by trader then all we have is an explanation for change not for levels. The question was why 19 Billion.

But more fundamentally, I am just saying that the reason Numbers of users is the most highly correlated with the value of these companies is not at all an indication that fundamentals don't matter, its just an indication that in the view of the people buying the stock user counts are better indicators of future fundamentals than current fundamentals are.

It's always and everywhere about future earnings.

Traders go where the action is which is where there are possibilities for changes in news. News about what, well news that investors view as having information about, future earnings.

40. This analysis reminds me that the capital markets facilitates predominantly the gamblers. The companies rarely benefit from the market.

41. Anonymous,
I don't view traders as gamblers but it seems to me that plenty of companies are benefiting. In fact, Facebook is paying for Whatsapp with its stock, which if your argument holds is being inflated by gamblers.

42. Enlightening post Prof. Damodaran.

I have a minor question. Re: FB's rationale of paying out \$19B, can it be estimated how soon FB can expect to increase its user growth by 160 million? IF it takes multiple years, wouldn't we then have to consider discounting the incremental growths, thus lowering the NPV of this project?

Thanks
SM

43. Wonderful piece.it... Very insightful... Enjoyed reading... Especially the Investor point of view...

44. Prof Damodaran - one of the most beautiful pieces of writing i have come across. brilliant work

45. Pro – They are not really buying extra users, as many pointed out, but they are buying extra time with users. Whoever spends 50% of their time in Whats App and 50% in Facebook, now will spend 100% in Facebook-owned enterprises

Con – I don’t really think WhatsApp can ever make a lot of money. First of all, from personal experience, their dollar-in-second-year model does not seem to apply all that well. I have had the app for a couple years and was never charged anything.

Second, a lot of people can pretty much bring their networks to whatever WhatsApp-like app they want. If WhatsApp starts to charge 5 dollars, most of my friends will start using Viber or whatever other backup app everybody has anyway. Notice that, in emerging markets, it is harder for teens to pay that dollar or five dollars because not many people have access to international credit cards.

From personal anedoctal experience, most young Iphone users in Brazil don’t even buy anything because they lack the means to do so (access to an international credit card).

Overall, I think Facebook is getting a little desperate to avoid growth reduction and, ultimately, negative growth. They have 1.2 billion users already. They will hardly grow into N. Korea, rural China and the poorest parts of India. And recently most FB users started sharing their time among FB, Instagram, WhatsApp and what not.

FB built a wonderful business, and it`s probably worth billions and billions of dollars, but I fail to see how they can improve it. They are basically buying companies away to keep their market share still for the medium term.

In the next recession (whenever that may be), they will be hit really hard – the advertising budget is the first thing many companies cut. So now they cant grow much,but they are exposed to serious threats on ROC when things get rough – even though FB has a powerful network barrier to entry, that’s probably priced a few times in there already.

@Dan – I know many traders who don’t care at all about earnings. Some Technical Analysts don’t even care about Relative Valuation. It might seem preposterous and wrong to most investors with a value tilt, but a lot of those traders get good results. Momentum is a very powerful force – it is about knowing when to get in and when to get out, and some people can do that.

46. Nice article. Investing and trading are always like chalk and cheese. To don both the hats together at the same time is quite difficult.

47. Professor,

How did you get your to your EV values? If Facebook has a market cap of \$173.5b, a \$160b EV would imply -\$13b net debt when they only have \$3.3b in cash. I didn't calculate the others, but I noticed they all have negative net debt.

48. Great article, thanks!

49. Great writing - and not just in the context of financial writing!. My first reaction was something you alluded to re: teen volatility. These financials bake in some level of perpetuity. Teens are not good at perpetuity. yesterday’s Zynga becomes, well, today’s Zynga.

50. Great post!!

Well, my two cents...

It seems to me the WhatsApp deal is not about valuation at all, but rather about innovation and security. Facebook is highly innovative and lives in a highly innovative and disruptive neighborhood. This deal seems more about securing FB's market position (adsorbing users, tech talent/IP, eliminating a future threat).

What good is it to be fairly valued if you end up out of business. Ride the tide, for better or worse but do what is needed to keep a leading position.

For us investors, momentum and macro factors can have a big affect on our investment. Innovation investments are not for the faint of heart. If people want valuation, sell FB (and Amazon) and buy Apple. Or better yet, get out of technology/innovation altogether. Why did Google basically double last year? Did it's business double? Nope. Market liquidity and maturing early-stage innovations seems to be a cause.

I just think 'Facebook' and 'valuation' do not belong in the same sentence in the first place, so better to adjust our expectations and invest accordingly than try to apply an external expectation. Buyer beware.

51. Very interesting post. It got me thinking. Thank you. Trading is a zero sum game -- actually negative when transaction costs are taken into consideration. For a trading position to work, one has to find another party willing to take the other side of the trade. On has to exit the trade profitably.

I am not sure that Facebook has any way to "exit the trade" in this situation. Many voices have pointed out this very fact. It is really tough to monetize a WhatsApp position in any reasonable time frame. Think AOL/Time Warner and the "synergies" there. This is a great risk/reward trade for WhatsApp, but a lousy one for Facebook.

Facebook should instead be buying carriers or favorable carriage deals with its inflated stock price. Now that's a trade. And yes that is an AOL/Time Warner-like situation. Facebook will need help when net neutrality erodes and the value of third party content plummets as carriers favor their "own" content on their own pipes and airwaves. When the Facebook experience slows down for users, I think it will be a tough sell for the market to "continue to price each user at \$130."

Trading is an inherently short term mindset. But that doesn't mean that a company shouldn't use its short term highly valued currency to buy wisely for the long term. Very few traders can beat the market over the long term. But a company in Facebook's situation can turn a trading opportunity into an wise investment for the future. And investing is not a zero sum game.

52. Your writing tells me one thing, everything can be explained in a simple and comprehensive way. Excellent post Prof. Damodaran

53. @Dan – I know many traders who don’t care at all about earnings. Some Technical Analysts don’t even care about Relative Valuation. It might seem preposterous and wrong to most investors with a value tilt, but a lot of those traders get good results. Momentum is a very powerful force – it is about knowing when to get in and when to get out, and some people can do that.

This isn't a morality play. It doesn't matter who thinks what is preposterous or wrong. Results of individual participants also aren't the issue, you'd expect some to do well just by chance.

There are traders who have volatility as an underpinning for their business model. I just don't see what that has to do with the valuation. facebook was an attractive volatile stock for traders to trade at 30, at 50 and at 80, and when momentum was ups and when it was down. So it's a hard case to make that someone with a short term position is determining which price FB trades at and which direction the momentum is going.

Damodaran started this confusion by not clearly defining his terms and distinguishing between traders, risk takers and investors.

54. Dan,
i am sorry that I confused you but risk is not on the investor/trader dimension. It is a different dimension. Put differently, you can be a low-risk trading investor, a low-risk taking trader, a high-risk taking investor and a high-risk taking trader.
Here is how it will play out. Investors measure risk in terms of fundamental, value and margin of safety (the difference between price & value). That is why you can be a low-risk investor in a high growth company, i.e., if the price drops low enough, relative to value. Trader measure risk in price movements (especially in the wrong direction), which is one reason you can be a high-risk trader in a stock with low fundamental risk (if its price is in motion).
If you want to define investors and traders differently, that is your prerogative but let me have my definitions.

55. I pay Verizon \$5/month (i.e. \$60 per year) for text messaging, which is the primary use case for SnapChat today, as do many other people in developed countries. Your \$5/year breakeven is 8% of that price. Do you see that as a cap to their pricing potential and why when the incumbent service is so much more expensive?

SnapChat's CEO has been very clear that he doesn't like ads and that some services should be paid for. Internet services today are largely ad supported, but we pay outright for most other service and goods we receive (including telecom services). I think the big hurdle is getting people to pay anything (i.e. \$1 instead of 0), after which the actual amounts don't matter that much.

56. The article is well written and explains the trader and investor prospective. As you rightly implied, the social media industry effectiveness is driven by users visiting and browsing site. I fail to understand to buy application like Whatsapp which already had set market and most of users overlap with FB. It would rather be better to buy small IM company and add that as an additional feature for FB users. In the merger with WA, it seems the no of users for FB will not enhance as most of them are common. So the forecasted hits or revenues would really not be able to justify the buying amount unless there is different strategy planned ahead.

57. hahah this make sense.Initially its like wow 19 billion seems like a lot, but when you compare it with FB valuation it makes sense. If people want to pay 2 million\$s for a porche it would make sense for them to pay 500k for a Toyota... I guess.

58. You have laid out a strong thesis. And there are several aspects of merit. There is a big element of frothiness in the markets in the stock prices of many companies BUT this particular deal makes sense. If Zuck could have done it at a better price, it would have been better BUT better done this way than not.

Let me digress for a second. Steve Jobs would have flunked (or gotten a B+ max) Marketing 101 courses in most business schools BUT he was one of the greatest marketers ever.

Same with Valuation. From a theoretical valuation perspective, it makes total sense. But there is a huge strategic aspect that valuation exercises completely forget.

If you've actually run competitive strategy & I mean not McKinsey or corp strategy - but I mean run a business unit or company where you had to beat up a competitor or threat, then you'll understand. Else, you'll scratch your head.

WhatsApp - was a headline risk, potential threat and most importantly if WhatsApp, WeChat, Twitter, SnapChat came close to 1 billion users or >500 Million users then Facebook faced the threat of perfect competition & loss of pricing power with its clients.

You just cannot let that happen. Period. Valuation professors will not get it. If you lost pricing power in your product, then the economic value you lose > \$19 billion over the lifetime. If a big Internet player had acquired WhatsApp, Facebook stock price would have been cut in half. Instead shelling \$16 Billion (~10% to 15% stock) is fabulous. And that is the logic to be applied.

There are cases when a company acquires a company to bail out a VC investment or self-interest of some exec. That aside, this logic is valid in several more M&A cases. Oracle should have acquired Salesforce.com to delay the SaaS model. Today, Oracle faces major economic pressure due to SaaS. The loss in economic value far surpasses the price (even assuming a 35% premium) Oracle would have had to pay for CRM in 2008/2009.

Finally, if we applied Valuation or Corporate Finance Net Cash Flow difference decisions to business school degrees and PhD programs, the decision might be - Don't Get a Degree! Yet many do!

59. Anonymous,
If your basic point is that Facebook had to do this acquisition to defend its business model, think of what says about the business model. If a two-year old messaging company, with 55 employees, can threaten your margins that much, I would shudder to think of how Facebook will have to pay to buy out real competition.

60. Probably the most level-headed and objective take on the WhatsApp deal I've come across. The advice on not shorting is probably spot on, the market can remain irrational longer than you can remain solvent, if it's indeed irrational in the first place.

Thanks for the great article!

61. Dr Aswath, could you please provide instructions on how we might convert your analysis to on a "per eyeball" basis? Your analysis assumes "per user" is the dominant driver, but in fact there are two eyeballs for every user. Plzzz explain your rationale, if it is not proprietary.

62. Loved it. Sir, please continue posting.

63. Well, while I can see how you/many would shudder, Zuckerberg is nipping it in the bud.

1. Defensive acquisitions/nipping in the bud is smart & many have done it.

I used to joke around when MSFT paid what seemed then an "obscene" amount for a small FB stake. It was to a large extent to keep GOOG off the deal.

eBay acquired Half.com right around before it went public - a lot had to do with not having a potential threat around.

Amazon.com acquired Quidsi (Diapers.com) right as they were getting ready to file...

2. Seemingly exorbitant acquisitions in the hands of the right players can turn out to be genius moves in hind sight! Great ideas are often rejected and laughed at. Business Insider had a list on this. Walt Disney was fired for not being creative. When he pitched Mickey Mouse, he was laughed at. George Lucas didn't get traction for Star Wars easily. HP didn't get Apple when Wozniak pitched it! Look at where the two companies are today!

I used to make fun of Google flushing \$1.5 billion down the toilet for YouTube that was essentially a handful of people. Today, 90% of my media consumption (esp. Indian content) is through YouTube.

YouTube seems like a genius play today!

There was a Business Insider article on WeChat being a \$1 billion business... And if WhatsApp can morph into a mobile payments mechanism, it could be huge - essentially a Square without the hardware.

Yahoo had it all but didn't know how to use them - Broadcast.com (Mark Cuban) could've become YouTube, Geocities could've become Facebook, etc. But that's where the CEO comes in. Mark Andreesen laid it out correctly in an interview that the entrepreneur/founder CEO is often the best CEO. And in tech, the CEO needs to have a tech background to be able to make those big calls. A Terry Semel or a Carol Bartz (she's an even bigger bozo - ignorant & confident in Mark Twain's way) will screw up but I would trust a Steve Jobs, Larry Page or Mark Zuckerberg to get it right.

3. Finally, the list of companies that refused to buy great companies at great discounts (often due to seemingly high prices) that turned out to be huge mistakes is extremely long.

Excite refused to buy Google for \$750K (Vinod Khosla mentioned about this in an interview). Yahoo's bad acquisitions under its bozo CEOs are well known (not buying Google, later Facebook...). Jerry Yang was a better investor than Terry Semel and other bozos. Oracle refused to pay \$25 million for WebLogic back in the day and eventually bought it at a huge premium...

We can laugh all we want but I believe in Zuckerberg. I know his profile - I do not like him as a person and would not work for him or hang out with him... But I know that he's a very smart businessman.

Circling back to the first point, the savviest & most paranoid will nip competition in the bud, not let them grow big and then deal with it. Intel was savvy in quashing many before they got big. Yahoo could have done that but many failed.

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65. Excellent Piece of Article Sir.. I got to understand today why and how social media companies are actually issuing stocks at ridiculously high prices, why facebook IPO was such a hit that on the first day of listing. And finally some realizations on connecting the understanding between how similar is the valuation between dotcom companies and social media ones.. A totally new dimension between how market is valued at fundamentals by "eggheads" how traders and markets prices them on different parallels and mostly importantly how corporates actually view this as an opportunity to make money or buy assets like whatsapp with overpriced valuations because... its paid by investors money at the end with their overprices shares..

66. Everyone u kno is on FB bt also everyone else u dnt nd dnt want to kno is there. So u cant just leave FB 'cause u wont find an equally friends rich platform -FB understood well our psychological need to stay connected nd dat sense of belonging we all seek- Bt still u dnt feel as comfortable as u used to when sharing anything on it 'cause the platform is too crowded. In fact u dnt kno who yr FB friends really are.

Bt u kno everyone in yr phone address book! 'cause u chose to save their numbers! They matter to u! So hw bout a tool that allows u to share nd stay connected with everyone u care bout regardless of their geographic location, phone carrier, and instantanly! On a device that u carry on u evrywhere u go and for free!
That's what WS is to FB. Useful, intimate and simpler. Its not another teenager thing its that magical tool u need to communicate and share pervasively. Bt again up to now I dnt see how to monetize it. Bt someone will soon or later

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69. Sir with all due respect to the numbers and explanations, Facebook paid whatever it had to, to acquire whatsapp so FB can prevent it from becoming the next FB (or killing FB)

70. Professor Damodaran - I looked at the deal from a Facebook stock perspective -- https://medium.com/tech-talk/422a3d8f81ac. From this standpoint, it looks like a good deal for Facebook. What do you think?

71. Good analysis. But I still follow the old school, all that matters is revenue, revenue and revenue. Yes, playing the Sequoia Capital game user is #everything, but as a Warren Buffet follower, if there's no money returning so, all of I can do in this industry it's just playing with known variables and/or using trader cap just for playing, not caring a serios biz. In other words, being a trader here, it's more a playing posture than the origins of my wealthy.

72. I think the key here is also that FB used a lot of their own stock to fund this acquisition. So they are using/tying the metrics of how they are valued to WhatsApp. If the "bubble" bursts and they are no longer viewed that way, then their acquisition value will also go down with it.

73. This comment has been removed by the author.

74. I think, FB realized to be part of the IM success story.

After the unsuccessful try to acquire SnapChat, they noticed the Whats App growth potential, and presence in non FB dominant geos. And if they didnt pay this amount now - they may end up paying almost double this amount one year from now (provided WatsApp gets 350 mil users and increase in valuation /user.

Apart from that - after the success on the PC/Laptops, FB want to ensure its leadership on mobile screen; and that's the part of their 'strategy to become a mobile company.

76. A good article...

One possible rationale I could think of is that whatsapp was clearly eating into fb messenger. Fb, as interested by zuckerberg, is trying to be a mobile content company...and what's better than whatsapp?

77. Dear Professor

Great Points.

However, there are some complex arguments that can be made. Just wanted your take on the following? (Granted that ultimate value is cash flow)

1. Build vs Buy: Traditional M&A takes into account build vs buy. However how do you value an acquisition where you have failed to build, even though estimated cost to build may be much lower.

2. Need to achieve diversification, especially when there have been doubts raised about sustainability of the business.

3. Need to signal that you believe in the valuation that your own company is getting

4. If you are worth close to 50 billion dollars, a few billion dollars up or down does not matter vs the marginal investor

5. Since FB has been doing well, no body yet has questioned governance and minority rights. Remember Zuck has disproportionate voting rights. How does and investor view this or is that part of the deal.

6. How do you value a competitor which can hurt or is already hurting your cash flows, even if it does not create cash flows of its own.

78. Following are my views:

(1) Facebook is an extremely ‘over’ valued company. To keep up the illusion of its value, to distract the market/investors, it has to do all sorts of gimmicks like the acquisition of Whatsapp etc.

(2) Facebook is worried about competition. Acquisition of Whatsapp is not really an investment for it, it is more of cost of running existing business or creating barrier for entry for others.

(3) If Whatsapp starts charging its customers, most of the customers will disappear overnight.

(4) If 55 employees can create Whatsapp in few years time, what is the guarantee that another 50 employee company in Bengaluru do not come up with a better product than Whatsapp? Mind you, creating another Facebook, Google, Twitter, Whatsapp is not only easy, the recent valuations bring more people trying for it!

(5) “The key variable in explaining differences in value across companies is the number of users.” What a joke! Here we are missing one point, the ‘quality of user’ vs. ‘quantity of users’. Need to consider the users who have ‘income to spend’ rather than ‘curiosity to hang on to the internet’, as they have nothing else to do in life. You could write a program to create dummy users! If this is the criteria for valuations.

(6) “Social media companies that have users who stay on their sites longer are worth more than companies where users don’t spend as much time.” Again, you only see people who do not have any other productive work to do, hang on to Facebook web sites. Obviously, they will be worthless customers!

(7) “Making money is a secondary concern (at least for the moment)” For whom???

(8) Facebook’s \$170b valuation with \$130/user in itself is questionable. Approximately 1/3rd of facebook account holders hail from poor/developing countries like Brazil, India, Indonesia, Mexico, Turkey, Philippines, who would be delighted to know that their user IDs are worth so much!

(9) In terms of Facebook getting incremental users, I doubt that is the case, as most of the WhatsApp users are already Facebook users (I may not be 100% accurate here, but confident that the common users would be almost 90%...., no statistics to prove unfortunately!). Has anyone got this statistics?

(10) Finally, Facebook is riding on this Tiger (social media bubble) which it does not want to get down, hence has to continue with such gimmicks! All the best for Facebook investors!

79. Hello Sir:
If we compare past deals (Instagram within FB ecosystem - a 1 Billion Deal for a 50-100 Million Users) that means the marginal value added for new user is an increasing function in FB's mind - true.

A game theory analysis by comparing this with threat of Google acquiring Whatsapp is also convincing.

Now consider Microsoft deal of skype (an all cash deal) on face of it, it was a good move wrt integration of product portfolio for enterprise offerings for microsoft, but even there the beneficiary was FB (Microsoft acquiring Skype, kept FB happy as google was not the acquirer)

But nowhere in the history of these we have a reasoning of EBIT/EBITDA.

So from strategy point of view why should one acquire companies in internet space when all the players are playing short term chicken egg or game game.

80. Thank you Sir for the excellent post! I would say that it is an overpriced deal, however, sensitised to the extent that major part of deal involved issue of shares of FB to the Whatsapp shareholders.

81. Sir, an interesting question her is: By assuming that 160m WhatsApp users join Facebook (more than a third of its current user base of 450m), it is assumed in the first place that none of those are on Facebook already. I think some research needs to go to as to how many of WhatsApp users are not on Facebook.

82. What would Whatsapp's value be if Telegram continues to grow as It has?
www.telegram.org is:
- Same product (apparently even more secure)
- Zero cost to change from one app to another
- Immediate replacement

Has FB paid way too much for WA ???

83. Absolutely right Fernando,
The Telegram is more beneficial compare to Whatsapp this is also give you multiple features with more security. Thanks for sharing this blog and congrts Facebook.

84. I do not understand this at all. It's an application that allows you to message someone with a Blackberry from an Iphone? You mean like text messaging? Or if you want to use wifi instead of your text plan, GoogleChat/Voice? The Facebook messenger app that's already available? Pidgin / Trillian that combine multiple messaging services? It couldn't possibly have cost FB \$19 billion to develop their own cross platform app, so it seems that they are buying the user base more than the app itself, but my thought is unless they funnel more money into it to keep it the most popular cross-platform messaging app this could easily become a bust.

I'll be interested to see how this plays out.

85. A brilliant piece and very interesting discussion on the topic.

There is one dimension which is not considered/debated on the Facebook/Whatsapp analysis - which is time.

Longer the duration, higher the uncertainty, the more difficult it is to value an asset. Marginal changes to variables have a large impact on value. Consequently, for an investor it makes sense to focus on the variable and its volatility. The variable is easier to track and act upon. In the case of social media the key variable is "users".

Traders (or even short term investors) intuitively understand this and are quick to price the immediate impact of the variable. i.e. pricing action is reflecting current market information. But the trader leaves investors to figure out the value implication which invariably takes long time to figure out and settle, given the volatility around translating the variable into value, after understanding the range of outcomes.

The challenge for an observer is that both operate in the same market place though maybe at operate ends of the spectrum. The impact of one versus the other in a market is a function of uncertainty involved in evaluating an outcome.

86. This comment has been removed by the author.

87. But we don't know here how much percent of existing WhatsApp users already have a facebook account, even less about the potential WhatsApp users will have already had a facebook account. A higher number indicates a thinner synergie in your model.

88. Awesomely Written... Great Stuff! Thanks.

89. Awesome stuff.. very well written, Thanks!

90. Hi,

really enjoyed your blog. What makes the numbers even more challenging from the investor view is that Apple take 30% of all revenues generated through the App, so FB are going to need iOS users to spend 43% more to get to their target revenue figures.

James P

91. Very clear writing. Thanks so much for sharing this

92. First, probably the terms of the deal are related to industry fundamentals (\$/user, growth rate, etc).
Second, is necessary to consider that the transaction will be paid with FB stocks, which have been analyzed through the same methodology...
Facebook is paying with the same coin...
Bubble trouble for investor \$ traders???

93. this piece is great, only one question, in the calculation about the user increase after FB acquired WhatsApp, its really hard to figure out how many WhatsApp user are actually being draw to FB since people using WhatsApp may also using FB, simply add two company's user base together doesn't sounds reasonable.

94. Very nice piece but a couple of thoughts:
1. Confidence in management absent, and just a pure numerical analysis may be short sighted, ie You Tube where i am sure you probably said Google was overpaying.
2. Zuckerberg is a substantial shareholder and if wrong will see a substantial hit to his net worth
3. The sellers of the company are receiving FB stock and while I have not seen anything to support the view, I have to believe they are not going to be exiting FB stock in a material way anytime soon. I would hope for there to be a lockup precluding them from a material exit, but have seen nothing to support the view.
4. Google was looking to acquire the company for \$8-9 billion and might have raised their bid to say \$10billion(who knows?) so the question is how much write-off if any down the road should take place and what can FB absorb without it being detrimental to its Mkt Cap?
Only time will tell; so the question I would ask you is how many years until we see whether this works out or not?

95. Re "If your basic point is that Facebook had to do this acquisition to defend its business model, think of what says about the business model. If a two-year old messaging company, with 55 employees, can threaten your margins that much, I would shudder to think of how Facebook will have to pay to buy out real competition."

I don't understand why a 2 year old company with 55 employees is not "real competition".

- Number of employees has nothing to do with how competitive you are, especially in technology.

- WhatsApp is more than 4 years old. And again, the age of the company does not determine how competitive it is, especially in technology.

If a company is taking your users and their time away from your product then it is "real competition".

On the other hand, Google is over a decade old and has thousands of employees. That still doesn't make Google+ "real competition" for Facebook.

96. I am perplexed with the valuations of FB and other social media companies. As you said the value is based on an absolutely mobile asset ie the number of users. If the advertising companies start asking for the number of user hours on FB, then that could be a big challenge for FB. The number of users seems to be a misleading metric which can be used for valuing a social media company. The smart thing about the deal is FB has paid close to 80% in stocks which is already running at a premium valuation.

97. I read the below news item in FT today:

WhatsApp will offer voice calls to its 465m users around the world in a new threat to the traditional telecoms sector just days after its \$19bn acquisition by Facebook. The new service, which will be offered on the same low-cost basis as WhatsApp’s messaging platform from next quarter, could help wipe hundreds of billions of dollars from the revenues of mobile carriers in the next five years, say analysts.

My question is how does this bit of information be used in valuation model? I am not sure the future loss of revenue of mobile carriers will result in gain to Whatsapp. Is Whatsapp going to play the role of a 'suicide bomber' in the industry?

98. Agree with the comment made earlier- wish all financial writing was like this, excellent!

I agree that the revenue isnt a focus in the immediate term- for instance, I am not sure how many use a paid version of the app; in several cases I know of people using whatsapp free even after 2-3 yrs of services

Overlap of FB and Whatsapp users- 35%-40% new FB users from Whatsapp seems a very high number (160mn). A 5%-10% number at most is likely!

Amazing how a simple IQ messenger type idea (which most of us would have used on computers) being taken to mobile, and with such success.

99. Well the mostly users of Watsapp is already on Facebook and the maximum users of it are teenagers.Therefore, the number of new FB users may be closer to zero than the required 160 million needed to justify the traders numbers.

100. Excellent analysis. Understanding the WhatsApp deal has been a challenging exercise.

With regard to your correlation analysis, Facebook seems to drive much of the effect. If you remove FB and rerun the correlations, a somewhat different picture emerges. While Users still have the highest correlation with Market Cap, the correlation falls to 0.62. The correlations between Market Cap and EBITDA and Net Income are essentially zero within the non-FB group. Lastly, while Revenue has a correlation with Market Cap of around 0.6 (very close to the one for Users), the correlation between Users and Revenue is negative (-0.17).

Seems Users still matter a lot, but there is a lot of variability in the pricing of Social Media firms.

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105. One aspect that I didn't find in the article, nor in the comments below at a cursory glance, is the fact that WhatsApp won't be standing still -- they will continue innovating and create new revenue streams. Indeed, they've already announced a plan to offer voice calling from next month! Surely that won't be free (for long, if at all). Just as surely, Facebook was aware of this during their due diligence, and would have factored in this entirely new revenue stream. Make no mistake, once you have a huge mass of (inter-networked) users on your platform, you can certainly create new features and capabilities and monetize them.

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107. @Vishal Dutta: The point of WA not being real competition is that there are small companies getting big all the time. FB wasted 20+B already with WA and Instagram. Every year there are a few new apps becoming the next hot thing. How many can FB buy? How many will bring it any long term return? Once the buying power subsides, how will FB prevent the 25th new competitor from running FB into the ground?

@Neeran: There are many other companies that can provide iText for free, such as Viber, WeChat and Kakaotalk. The same thing will probably be true for voice chatting or whatever WA may develop. WA does have a lot of users, but they’re all a click away from getting the same services for free. WA works so far because it’s free.

@Anonymous: Tying WA’s value to a possible mobile payment triumph seems to be stretching it. Why would WA monetize this? M-Pesa is much more experienced, GOOGL controls Android and AAPL controls iOS, FlappyBird, banks/credit cards have the appearance of security desired for payments and on and on. In fact, any app can “try” to do online payments – FlappyBird, FIFA or even FB could try it just the same as WhatsApp. More importantly, new entrants can launch mobile payment systems out of the blue. Personally I think it will be hard for anybody but M-Pesa and the credit card companies to establish an advantage in this market – WhatsApp is just another player.

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109. Very informative and excellently explained!

110. Awesome article.
Active network size does make a difference and I feel WhatsApp to google would have infact created more problems for facebook.

111. Very insightful...one question though...you have pointed out how whatsapp's ability to generate additional revenue for fb is limited (assuming continuation of current model) and also whatsapp may not really bring too many new subscribers in the fb fold...but what about richer data that whatsapp may provide to fb on its users?Fb has been struggling to get its messenger going but ppl have been hooked on to whatsapp where they are sharing a lot of information in groups or 1-on-1..perhaps this rich source of data can help fb monetize its user base better improving its revenue/user...shouldn't that be incorporated into valuation?

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113. In "So, what's next?" point 1) you wrote: stop explaining social media stock with fundamentals.

However looking back to Google, I see PE=131 in 2004 vs current FB PE 117 and PS=16 vs PS=22

Also, I see that current ratios have increased form last year. Market now thinks FB is like GOOG 10 years ago.

So unreasonable? I don't think.

Aldo

114. By the way I'm looking to
http://financials.morningstar.com/valuation/price-ratio.html?t=GOOG

115. These social media stocks are very overvalued.

116. Thank you Prof. Damodaran. Very well summarized. As you know, I've been grappling with this application/intersection (or lack thereof) of traditional methods of valuation and start-ups/web/social media companies for some time now. Your post helps put this into context.

117. They are the most profit maker on web.
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118. Dear aswath damodaran,

Very interesting analysis. You gave me a new prospective on how to understand such deals. I just have one question. How did you calculate the 8% Implied Required Return on Equity based on Stock Value on 1/1/14?

Thanks.
Abdulmalik

119. WhatsApp is famous for its easy to use add free text messaging service and free content sharing. Unlike any other software developer company of the world, WhatsApp team has only 32 engineers for its huge 450 million users, which means 1 WhatsApp developer serves 14 million users. And still we don’t find a thing to complain about. Compared to any other service WhatsApp’s growth rate was very fast. Only nine months ago WhatsApp announced its 200 millionth customer and now it has 450 million with approximately 72% of active user.

120. This comment has been removed by the author.

121. Whatsapp purchased by the Facebook owner is a great news and the pricing perspective you have shared and the deal which they have mad with each under the conditions and norms you have nicely explained here, I doesnot have deep knowledge about this but now its clearly known to me.

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125. Might be interesting to use this transaction to see how Facebook value's its own share. So you have Value of Instagram = Cash + Value (not price) of Facebook share. Facebook will value its own shares as Value of Instagram - Cash Component paid.

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135. Thank you for acknowledging that fundamental and trading evaluations are different and require different hats.

136. Bumping 8% up to 10% seems like small premium for a stream of cash flows with so much risk. A 20% required return seems more like a fair ballpark to me.

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