February 23, 2014
Weekly Market Outlook
By Keith Schneider
This week Facebook/Marc Zuckerberg bought a "startup" called Whats App for 19 Billion. Their product is a messaging app that circumvents those nasty text messaging fees imposed by wireless carriers working cross platforms as well. They have almost 55 employees all of whom own stock in the company which brings the average net worth per employee close to couple hundred million or so, after deducting the ownership stakes of the two founders.Whats App also boasts having 450 million users, most of which are outside the US and young, demographics that Facebook desperately needs to attract. Just doing some back of the envelope calculations (yes, that relic from past) it comes to about $ 42 dollars per user or about 10 million users per Whats App employee, assuming you adjust this for how many new users they will have by the time you finish reading this. As a trader and investor, it’s critical to follow the flow of big money, and with all the talk of the charts looking like its 1929, does this transaction mark the start of another tech bubble and Market Top or additional confirmation that the sector to watch is Social Media?
What is most interesting is that Whats App is the fastest growing app ever, and not a penny has been spent on advertising. It begs the question, is Zuckerberg deranged or brilliant for spending that 19 bill? If you are going to build a social media conglomerate then buying the fastest growing company in the space might be the latter. Real time Mobile messaging is the key to the Matrix. If you a looking to control it, then 19 Billion is the entrance fee. If you are looking to get access to 450 million multi-nationals cross border phone numbers to market something to in the near future, then it’s not insane, a rather a gutsy move.
If Facebook is looking to reinvent itself before someone else does then it makes sense. If however, you are looking at the old paradyne of projecting valuation from cash flow ($1 per year per user, or 42 years to repay your investment) and other standard valuation metrics, then the price is deranged and Zuckerberg is potentially paying 6-7 times too much. Some tech insiders are looking at the What App as a teen fad, potentially replaced by other apps or the phone carriers themselves. However, the new mantra is build it fast, go viral and monetization will follow. Considering Facebook’s current market capitalization, the price tag of 19 billion for Whats App seems reasonable versus becoming irrelevant. One thing is certain; the monetization of Whats App short term is not a priority. To distill even further, the bet that Facebook is making is that one way or another Whats App is not a fad, and at some time in the future it will monetize, plus give Facebook substantial control over human communications. The $1 a year price of Whats App charges per user is not what‘s it about or etched in stone either, so projecting off those metrics could is nonsense. The power of mobile computing and real time messaging is what is in play and the keys to that kingdom are priceless. Who do you want to own that?
Meanwhile the markets stalled while touching new highs in the S&P 500 this week which was not surprising considering the speed and magnitude of the recent rally. We are keeping an eye on emerging market debt as civil unrest seems to be touching down and spreading in those parts the world. The disconnect between that and the market makes us uneasy. If civil unrest abates it is possible to get a parabolic blow off. On the other hand, if things persist, a nasty decline is in the cards. Either way equity prices are not stable at these levels and volatility is not priced correctly. In these types of markets one needs excellent short term tactics to position correctly with complete flexibility.
To see where the inflection point’s lie go to this week’s video...
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