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.
Helen says
Love your articles Jon – always reading them now.. Cheers!
Dave Bamford says
Hi Jon,
This story is trggering memories of the lead up to the “dot com” bubble. Speculation on companies without substance. What’s the odds on Zuckerberg’s financial adviser made a nice sales commission?
Also,the foreign purchasing of property is pushing real estate up – I hope there are enough smart people out there to keep them from pushing it too far. If real estate grows at, or over, 15% for 3 years, there will be a lot of “me too” late investors burned when the market corrects.
DB
Bob Adermann says
Looks like we have another dot bomb coming.
Glenn says
I normally find your articles quite informative, however, I’m struggling to see the point of this one. A whole blog on how silly spending $19B on WhatsApp to show the strength of Aussie property….tenuous.
Almost no brand recognition just because you’ve never heard of it? And then you contradict that comment by admitting they have 450m users…..no brand recognition? Silly. Also, you write a whole blog essentially rubbishing the purchase of a product you’ve never heard of and therefore no nothing about.
Facebook had trouble monetizing users on smart phones, they’ve fixed that and it has produced massive gains. There are smarter people than anyone here working on the WhatsApp purchase. Besides, even if it was nothing more than ‘protecting’ their own business model in regards to instant messaging many would say it’s almost worth it.
Jon, pls retain your credibility by sticking with what you know and leave serious commentary on social media and technology stocks to those who live that game every day.
Alex Cook says
Hi Jon, Love your style, always manage to put a smile on my face! BTW, the value of these dot com companies and in particular the social media sites, is not in what users pay to use them. It is in what the users “Like” and click on as that is active lead information that is sold to advertisers. Without it, Facebook would not be free and google would probably crumble! That’s where the money comes from. Watsapp will likely remain free, as you say, there are lots of other similar programs out there, skype, messenger and host of others.
You posted an article about the number of new Billionaires coming out of China and their lust for Aussie property. Does this not concern anyone? I live in Sydney and have seen first hand property after property going to over seas investors and the resultant increase in the market value. When estate agents tell you, “I have not sold any property to a non Chinese buyer in over 6 months” the alarm bells should be ringing. Where does that leave the rest of us who are not yet billionaires and where will it stop? Why is it that I can’t buy land in Asia but we sell ours off freely? Surely excessive foreign investment in Aussie property can not be good for the majority of Australians. If you already have a large property portfolio, you are probably OK but what about the rest of the country? I would like to know your thoughts on this.
Regards,
Alex.
keirahytten says
Hey Jon, i agree 100% with this article…its bang on…
Facebook has completely lost the plot.
I have a serious question however.
What level of pricing for Sydney property do u think is appropriate ultimately?
Say Sydney prices double in the next 3 or 4 years, to say a median of circa 1.2 to 1.4 Million AUD.
Is this actually a desirable thing for Sydney and Australians in general?
Sydney is already one of the most expensive cities in the world to live in, would a doubling of house prices, which would certainly make it THE worlds most expensive city to live in, be a desirable thing?
Would it help Australia’s competitiveness or hinder it?
Kind regards,
Mark
Kat M says
Better instant messaging, greater social media exposure, more selfies from wannabes getting sent around the world inviting more gatecrasher leading to greater alcohol sales revenues (more tax revenue for Mr Abbott & co.) hence extra work for police and security firms. F’book – I refer to it as buttbook because when I joined some years ago I uploaded a picture of my clothed rear end on it – Twitter, it’s bacchanalia 24/7. Mutliplier effect! House prices go up until population is decimated by nuclear war or viral mutation. Satanic majesty is proud.
carlos says
Oh dear, I believe you got lost here.
The real value of WhatsApp was the customer base. Facebook didn’t just buy a technology, which it could have develop by itself. It bought a huge customer base that it can capitalise on to recover the investment.
I read somewhere that Facebook paid around $40 per customer. I bet the company should be able to recoup that in advertisement linking the two Apps in the near future.
Yes, for some people in Wall Street seemed ridiculous and there was an initial fall of the stock price; but now analysts are waiting to see the next move.
Sorry Jon, not everything nowadays is so tangible as brick, mortar and land.
mark says
Do all of you wise sages that somehow think this Facebook move makes sense, remember what happened about 14 years ago? Do u know anything at all about Time Warner and AOL as an example??
I am a young entrepreneur, so am very comfortable with all things tech, but even coming from that perspective, the price Facebook paid for this tiny company is completely unjustifiable….. madness even…..
Where did FB get the 19 Billion USD from btw? Its certainly not from retained earnings…….
Hmmmmmmm….
Jon and I might have different philosophies about house prices, but we are both far wealthier than average, and we are both right about this 🙂
Glenn says
Mark, yes I do know about Time Warner & AOL…and congratulations on the wealth. Sadly though, you, like Jon, are just speculating. Neither of you are involved in the purchase of WhatsApp, nor do you know the plans for the company. You may be right in assuming $19B was too much, but nevertheless, Facebook can see value in it and that’s all that matters. If Wall Street & shareholders didn’t agree the stock would have dived on the news. And of course it wasn’t from retained earnings, few takeovers are ever undertaken purely from retained earnings. IN fact most IPO are staged for this very reason, to launch takeovers of other companies in order to expand rapidly. I’m sure you know that already though.
All any of us are saying is that to write a blog, supposed to be about educating people on property, about a stock takeover you have never heard of makes no sense. There were no insights whatsoever about potential reasons for the purchase, rather just ridicule for Facebook buying out a bunch of nerds.
Congratulations to the nerds, I bet they’re all wealthier both both you and Jon.
BTW, keep the normal updates coming on property insights Jon, always interesting to read.
peter says
Scientific theory for you. Suckerberg amd facebook are u.s.a gvmnt run entities. Wats app is just a purchase to add to the gvmnts ability to monitor its minions. Since this is scientific theory, it stands true, till it is proven beyond a doubt to be factually incorrect.
Reid says
Peter, I think you mixed your theories up.
A ‘scientific’ theory is a well-substantiated explanation of some aspect of the natural world that is acquired through the scientific method, and repeatedly confirmed through observation and experimentation.
A ‘conspiracy’ theory is an explanatory proposition that accuses two or more persons, a group, or an organization of having caused or covered up, through secret planning and deliberate action, an illegal or harmful event or situation.
Two very different things.
mark says
“All any of us are saying is that to write a blog, supposed to be about educating people on property, about a stock takeover you have never heard of makes no sense.”
Yep, that makes perfect sense.
And of course i’m not trying to defend Jon to hard here at all….
The significance to me of all this, is that all asset markets are getting very very frothy…
This is a great example of the madness that ensures in credit and asset bubbles…
On that basis, is now a good time to be leveraging hard into AUS resi property?
The world is awash with capital atm… pumping up values and driving down yields in all asset classes..
Can this last? Hmmmm
Anthony says
Jon, stick to what you know. Don’t waste your time and our time on a topic you admit you know nothing about. You sound like the child who got to the cookie jar and all the cookies had been eaten. I hope you stick to property when you are on stage.
Jonathon M. Green says
Agree with Glenn. Stick to what you know Jon.
For those interested, a potential major upside for Facebook comes with Advertising potential. Whilst WhatsApp itself has never and promises to never advertise, that is not true of Facebook. Imagine owning the worlds conversations in addition to the world’s personal profiles. Imagine the sort of targetted advertising capacity that would give you.
Jon, you likely dont know about WhatsApp because its’ major user base is located in Africa, India and across Europe. These are areas where Facebook is less strong (not so much India), and thus this purchase will give them a foothold there.
You also fail to mention that the $20M revenue gained last year are based on the user numbers of the previous year. Easy enough to correlate how quickly that will grow. And imagine changing it from 99c p.a. to 25c per month, still affordable (even in 3rd world), but 3x annual per user revenue growth. 450M users x 25c/mnth = $1.35Bn revenue. with only 55 staff to pay. and the user base is growing faster than any other in history.
And just to add to other’s comments… that had nothing to do with property. This article stinks of someone clutching at straws to mention trending key terms in an obvious bid for traction.
Keep it about property mate.