Should We Care About What FB Pays?

 | Feb 20, 2014 | 4:30 PM EST  | Comments
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Facebook (FB), after an extended run of making enormous amounts of cash, has started to splash some of it around.

The latest acquisition is a big one. It will pay $19 billion to acquire messaging company WhatsApp. As many are pointing out, $19 billion is a phenomenal price for a five-year-old company and the conclusion seems to be that it is way too much. I have no doubt that much ink will be spilled and many keys will be pushed as the debate rages as to whether this is a reasonable valuation or not, but I have a different question.

Do we, or rather should we, care?

Let's detach ourselves from the price for the moment. If we were informed simply that Facebook was buying a messaging company that has 450 million users and is adding around 1 million per day, we would have no doubt that this is a fantastic idea. So why the negative response? To be honest, I'm not sure.

There is a gut feeling that $19 billion is a lot to pay for a young company, but it isn't that far away from current valuations in the frothy world of social media. Twitter (TWTR), for example, has 646 million active users and a market capitalization of more than $30 billion. In that context, to a company that has proven its ability to monetize users, $19 billion for a rapidly-growing 450 million doesn't look too bad.

Even if you still think it is a little pricey, the question still remains, does it matter? There is no doubt that FB can afford it and analysts generally have a bad record of estimating the value of growth in the tech sector. I am sure that if Yahoo! (YHOO) had announced in 2001 that it was considering paying $1 billion for Google (GOOG) there would have been no shortage of commentators decrying the ridiculous overvaluation. For every Google, of course, there is a MySpace. But there is a fundamental reason why I believe that WhatsApp is more the former than the latter. When Yahoo! looked at Google, it was rapidly gaining ground. but when News Corp (NWS) bought MySpace it was already on a downward trajectory. The critics all claimed that FB overpaid for Instagram a while back and that Google's purchase of YouTube in 2006 was ill advised. Those two deals turned out OK.

What this deal offers is a chance for Facebook to further increase its presence on mobile platforms and increase the ratio of young to old in its overall user base. Neither of these things can be seen as a negative.

I hate to sound like a gung-ho dot-com analyst from 1999, and in the long term I do have serious concerns about pricing in the social media sector, but if Facebook is to grow in the current environment, it has to pay what is demanded to acquire fast-growing companies. There may well come a day when the social media valuation bubble bursts, but it isn't here yet. In the meantime, there is an awful lot more upside possible and for FB to get its share, it has to be aggressive, almost regardless of cost.

About a month ago, I wrote that the then-tumbling FB represented a great opportunity to buy the stock at a depressed price. It is up 24.5% since then, but this drop is another opportunity for those that missed out to get in relatively cheaply. Don't miss this one.

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