FACEBOOK'S $19bn (€13.8bn) purchase of WhatsApp is valuing the messaging service at a multiple that investors currently only bestow on companies developing life-saving drugs.
Based on a goal of reaching 1bn WhatsApp subscribers, Facebook is buying the mobile application for about 19 times estimated sales, according to data compiled by Bloomberg. The only US companies that fetch such lofty valuations are drugmakers that are developing treatments for cancer, Crohn's disease and other ailments, the data shows.
While the price tag may seem steep at first blush, Facebook is betting it will prove a lucrative long-term investment. The mobile-messaging service could help Facebook generate more growth from younger users that are slipping away, according to FBN Securities. The dollar amount being paid per WhatsApp user is about a third of the value Facebook shareholders place on the social media company's own user base, data compiled by Bloomberg shows.
"It's a staggering amount," Roger Entner, an analyst at US-based Recon Analytics said. "It's 19 billion reasons why mobile matters and why it is the future of Facebook."
WhatsApp, which has more than 450 million monthly users currently, is "on a path to reach over 1 billion people worldwide in the next few years," Mark Zuckerberg, Facebook's co-founder and chief executive officer, said during a conference call with analysts yesterday after the companies announced the takeover.
Subscribers use the messaging app for free for the first year and are charged 99 cents a year after that. One billion paying users would translate into about $1bn (€750m) in annual sales, bringing the projected revenue multiple that Facebook is paying to 19, data compiled by Bloomberg show.
Only 35 US-based publicly traded companies have a price-sales ratio of 19 or higher, according to data compiled by Bloomberg based on analysts' estimates for three years from now. All are in the biotechnology or pharmaceutical industry, including companies such as Puma Biotechnology, which has an experimental breast-cancer treatment, the data shows.
Facebook said in October that younger teens aren't using its website as much as they used to. The company offered about $3bn (€2.2bn) to acquire Snapchat in an apparent push to recapture younger consumers.
The start-up turned down the offer for its app, which lets users send annotated photos that disappear.
Facebook's market value of $173 billion yesterday, is equal to 144 times its 1.2 billion monthly active users. The social networking giant is paying about 42 times WhatsApp's user base, or $42 per subscriber, data compiled by Bloomberg show.