By Lauren Silva Laughlin
FORTUNE -- Is Facebook overvalued? The social network's shareholders have fared well since the company went public in mid-2012. Shares are up more than 80% since its IPO and have climbed steadily over the last six months. But investors have paused since Mark Zuckerberg, Facebook's founder, announced on his page two weeks ago that his company was buying WhatsApp, a young but popular social network. The price tag: a shocking $19 billion.
It's not just a matter of digesting the news. Investors already have lofty growth expectations built into the company's stock price. And as the WhatsApp acquisition shows, Facebook (FB) is working hard to justify those assumptions partly with acquisitions -- and it has good reason to do that. Based on at least one metric, a small blip to investors' forecasts could skim nearly a tenth off the stock price.
In many ways, the WhatsApp acquisition makes sense. Scale is important to social networking. Bringing WhatsApp into the fold only makes Facebook that much harder to touch. "The large and rapidly growing user base attracts new advertisers and retailers," Laura Martin of Needham recently said in a report. "We believe the scale of Facebook's network represents a significant competitive advantage and a significant barrier to entry."
However, paying top dollar to grow can turn into a dangerous cycle. "It can be like a dog chasing its tail," said Lawrence Hrebiniak, emeritus professor at The Wharton School of the University of Pennsylvania. If more interesting social networks photo-bomb this growing family portrait, Facebook will have to continue to purchase other companies to keep up.
Jim Chanos, the prominent bearish investor who runs hedge fund Kynikos, is skeptical that scale matters in general. He says he is worried "about the inability of these businesses to 'scale' profitability." "Everyone points to Amazon as their valuation framework safe-harbor, not the scores of Internet road kill." (Chanos is not currently involved with Facebook or similar companies.)
Investors don't necessarily have to choose a side just yet. But it helps to consider how delicate Facebook's stock price actually is, considering the outsize growth expectations for the company. Following Facebook's acquisition of WhatsApp, analysts started to kick around a metric different than one that's often used. Rather than value WhatsApp based on a revenue multiple, analysts showed how much Facebook was paying to acquire each individual WhatsApp user. That magic number was $42 per user ($19 billion for 450 million users).
It seems like a lot considering WhatsApp's business: It takes in 99 cents per user one year after they have signed on. But Facebook's users are worth $122 apiece at its current enterprise value of $167 billion, assuming the company hits Evercore's expectations of around 1.4 billion users by the end of this year.
The hope is that Zuckerberg will add some kind of magic sauce to WhatsApp users so Facebook can jack up their value too. But it may not be that simple. First, Facebook's users are worth more because they bring in more money for the company. Each Facebook user currently adds $6.73 to the top line. Evercore assumes this number will grow a quarter by the end of this year to $8.44, making each Facebook user worth some 14.5 times the revenue they contribute.
Add that to the 16% more people Evercore assumes will join Facebook, and investors have to hope things continue on the up and up.
Say those estimates are a bit off: Revenue per user grows 20% to $8.08. It is still a lot, but not what investors currently assume. And say that users grow a tenth rather than 15%. Each Facebook user at the same multiple (14.5 times) is worth $117, and there are fewer to boot (1.3 billion users), valuing the company at about $151 billion. Add back Facebook's $7 billion of cash, and the market cap of the company is about $158 billion, nearly 10% below its current price.
Small tweaks to a business model that needs to be scaled can be dangerous, especially when investors are paying top prices based on lofty growth assumptions
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By Mike Kwatinetz
FORTUNE -- When Facebook (FB) acquired WhatsApp last week for $19 billion, it set itself apart from earlier generation technology leaders like Apple (AAPL) and Microsoft (MSFT). Facebook has decided that it wants to own the social space now, as well as in the future, and is willing to pay an MOREMar 3, 2014 8:45 AM ET
Facebook is paying around $19 billion for WhatsApp, in the fifth-largest tech acquisition of all-time. Will it prove bargain or bust?
FORTUNE -- Earlier today I appeared on CNBC to discuss Facebook's (FB) stunning $19 billion purchase of WhatsApp, the mobile messaging platform that has grown from 200 million users to over 450 million users in just the past nine months. In short, the hosts wanted to know if it was MOREDan Primack - Feb 20, 2014 1:29 PM ET
Facebook is buying WhatsApp for $19 billion. But that's not the only important number.
FORTUNE -- Like many of you, I'm still having a hard time processing Facebook's decision to pay around $19 billion for a four year-old messaging company. In the meantime, some numbers that weren't in the press release:
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Why the market jolt last week was the start of a sobering reality check for tech stocks.
FORTUNE -- Market prognosticators have conjured up many a reason for the two-day rout of stocks on Thursday and Friday, which sent the Dow Jones Industrial Average (INDU) plunging 494 points (3%) and the S&P 500 (SPX) down 55 points (3%). Some blamed the slowdown in China's perpetual manufacturing machine; others, the fears of MOREShawn Tully, senior editor-at-large - Jan 27, 2014 5:00 AM ET
Investors who are worried about Facebook's latest equity offering are overlooking the company's fundamentals.
By Sanjay Sanghoee
FORTUNE -- Shortly after Facebook's recent announcement of a new public offering worth $1.5 billion, for which Mark Zuckerberg provided 60% of the shares, Facebook stock fell amidst concerns that it is overvalued. The shares rebounded on optimism about social media, but it is a safe bet that such doubts will continue to plague the MOREJan 8, 2014 2:44 PM ET
Facebook is clearly tipping its hand today, saying that its stock is overvalued and the company isn't going to perform as well as the market believes it will.
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FORTUNE -- Mark Zuckerberg, founder and CEO of Facebook, will sell 41.4 million shares worth of stock in the company, worth $2.3 billion, to pay a tax bill, the company said. He apparently incurred the tax liability when he exercised the option MOREDec 19, 2013 3:00 PM ET
Snapchat turned down a $3 billion buyout offer from Facebook. And that's okay.
FORTUNE -- When word came last month that Snapchat had turned down an acquisition offer from Facebook (FB), I wrote the following in the Term Sheet email:
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NYSE gets Twitter... and the title.
FORTUNE -- This must be a pretty rough morning over at the NASDAQ.
First, chief rival NYSE managed to bring Twitter (TWTR) public without any of the tech snafus that NASDAQ suffered through last year with Facebook (FB). Now, NYSE gets to rub even more salt in the wound, thanks to this new Thomson Reuters infographic:
It is worth noting, however, that NASDAQ has making inroads in MOREDan Primack - Nov 7, 2013 11:46 AM ET
Twitter can shower riches on its outside board members.
FORTUNE -- Twitter does not provide its outside directors with annual salaries, but it's unlikely that they're complaining.
The micro-messaging service disclosed yesterday that its outside directors may earn upwards of $16 million in compensation this year, as first reported by Footnoted. It also seems to provide for up to $8 million per year going forward, or $16 million for a new director MOREDan Primack - Oct 23, 2013 4:36 PM ET
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