Facebook recently paid a ridiculous amount of money for a company with dubious prospects. It shows just how much influence QE ‘hot money’ is having, but Zuckerberg would have done better to follow the rest of the world into Aussie property.
Did anyone else catch the news last week that Facebook paid $19 billion of instant messaging provider WhatsApp?
Yep, that’s billion with a ‘b’.
$19 billion for a company with just 55 employees. And if you’re like me, you’ve never heard of WhatsApp. How can a company with almost no brand recognition be worth $19bn?
Madness. $19bn for 55 nerds, no brand, negligible revenues and very little earning power potential. Am I missing something?
For the same money Zuckerberg could have bought American Airlines AND Dunkin’ Donuts and still have had $2bn left over for face cream.
Or, he could have bought a large cap oil company and locked in $1bn in revenue every year. Instead, they bought a company that gives a valuable service away, for free.
Yep. For nothing.
Sure, it’s a useful service. Sending text messages over the internet for free. But it’s one thing to come up with something that people like. It’s entirely another story to convince them to pay for it.
Facebook hasn’t even mastered the art of making money out of its own massive user base. Where’s the business model here?
No one can really figure out why Facebook would pay the highest price ever paid for a company per employee – $345 million per nerd. That’s more than four times the old record of $77 million per employee – which was set last year when Facebook bought Instagram.
It is true that the WhatsApp has gained users (450 million) faster than any other social media site in history, faster even than Facebook itself. Based on current rates of growth, the $42 per user acquisition cost doesn’t seem so bad. But that growth has come about because WhatsApp gives away a useful service (text messaging) for FREE. It’s easy to build a user-base when people don’t have to pay anything.
Some have said that WhatsApp will be able to charge customers after the initial 12-month free trial period ends (it now charges 99 cents per year after the first year). Based on this model, the firm had revenues of $20 million last year.
But what happens if another provider comes in and offers it for free? The technology doesn’t seem to be that hard to replicate and the Google is already on to it.
And what are the phone companies going to do when they see Facebook and WhatsApp cutting their grass?
They might just bundle up texting with their phone plans. If they’re effectively giving it away for free, a company that offers free texts no longer has any value.
I just can’t get a read on what Facebook were thinking with this one. And I think this deal might be one for the record books, and not in a good way.
But then again I might just be missing the bigger picture. Zuckerberg didn’t pay for it with his own money. A lot of it as paid with Facebook shares, which themselves have pretty dubious virtue.
It may just be that Zuckerberg is helping hot money find a home, and his pocket is as good a home as any.
Because since the Fed turned on the QE money taps, hot money’s been looking for anywhere that’s offering anything close to decent returns. ‘Social Media’ still has an air of sexiness about it. Not that earnings are sexy. Earnings are as uninspiring as the Liberal Party Swimsuit issue.
It’s just that Social Media is the last hope for those hoping to make a quick buck.
So even if it’s just a dream, it’s the only gamble in town that still offers punters a hope (even if its false) that they might make a winning.
So speculative stocks in the sector have been flooded with QE cash.
And crazy buys like WhatsApp are the natural result.
This is what happens when you flood the world with money. America’s doing it. Japan’s doing it. Europe’s on the way.
And it just happens that Australia, and Australian property in particular, stand to be the big winners.
Bank of America-Merrill Lynch (seriously guys, couldn’t you settle on a name after the merger that was a little less ridiculous?) have released a study showing that Sydney property prices are highly correlated with US monetary expansion.
That’s what the graph shows.
The world is awash with money and that money is looking for any port that offers the prospect of decent real returns.
And the Sydney market, like any number of property markets around the country is one such port.
As the Chinese buyers keep reminding us, Australia property is viewed very favourably overseas.
And the money keeps coming. The Fed keeps pulling away from its taper commitments, Japan’s left the tap running, and Europe needs all the cash it can get.
The hot-money bull run in Aussie property has a long way to run yet.
Someone should have told Mark.