Sunday, February 23, 2014

Has It Come to This Again?

I first learned about WhatsApp a few months ago when a friend coming to Chicago from overseas asked me if I used the program so that we might avoid expensive international text messaging fees while coordinating our plans.

Now, I'm generally a late adopter of technology and wasn't surprised that I hadn't heard about WhatsApp before, but I never expected that I was overlooking a $19 billion enterprise -- the price Facebook is paying to acquire the company.

The initial market reaction to the deal seemed to be one of shock -- Facebook paid how much for a four-year old messaging service? But as the days have passed, the market seems to be rationalizing the deal as reasonable.

Indeed, I've read numerous reports about how the $19 billion Facebook paid actually a pretty good deal relative to other social media transactions...on a price-per-user basis.

When reading these reports, I immediately recalled the valuation metrics used during the Internet boom of the late 90s -- i.e. the "price-per-eyeball" and "price-per-click" metrics that were also taken seriously by analysts at the time. And we all know how that ended.

Whenever investors valuing companies on things other than assets, earnings, and cash flows it's time to be skeptical.

Maybe WhatsApp is a much more valuable asset than I think -- Mark Zuckerberg knows much more about social media than I do, after all -- but I don't believe the price-per-user metric tells us anything about the asset's intrinsic value.

If anything, I'm more concerned that investment community hasn't learned the lessons of the dotcom boom and bust and is taking silly metrics seriously again.

Stay patient, stay focused.