Facebook shares closed up 2.3 percent at $69.63 after falling as
much as 3 percent in early trading as investors got over the initial
sticker shock of the deal value.
At least two brokerages downgraded their recommendations on Facebook
to "hold" but the overwhelming majority of analysts remain positive
on the stock.
Facebook is paying more than double its annual revenue for a chat
program that has little revenue. The purchase price is slightly more
than the market value of Sony Corp.
But analysts noted that WhatsApp has over 450 million users and
boasts a higher level of engagement than Facebook.
"Facebook is the leading global social-sharing utility. Now, it has
a significant opportunity to be the leading global communications
utility," RBC Capital Markets said in a note.
WhatsApp is much stronger than Facebook Messenger in Europe, Latin
America, Africa and Australia and has attracted users at a time when
it appears that young people are turning away from Facebook.
Analysts said the price tag for WhatsApp, founded in 2009 by former
Yahoo Inc employees Jan Koum and Brian Acton, seemed reasonable from
the point of view of value per user.
Facebook is paying $42 per user, compared with a market value per
user of $170 for Facebook and $212 for Twitter, Deutsche Bank's Ross
WhatsApp's user base is less than half that of Facebook's 1.2
billion but the chat program's users are more active. On any given
day, 70 percent of WhatsApp users are active, compared with 62
percent for Facebook. WhatsApp's users are expected to reach 1
billion by 2015, according to many analysts.
"Looking past the sticker shock of $19 billion ... We view (the
deal) as an offensive move to gain additional share of the
consumer's time spent," Credit Suisse analysts said, noting that
Facebook was paying about 11 percent of its market value to gain a
30 percent rise in engagement.
HAVE SCALE, WILL MAKE MONEY
Of the 44 analysts who cover Facebook, 37 have a "buy" or a "strong
buy" rating on the stock, according to Thomson Reuters data. None
has a "sell" rating.
Analysts have commended Facebook's ability to make money from its
mobile app. Now they will want to see how it will earn money from
the chat app's huge number of users.
"While we don't expect messaging to be a meaningful near-term or
even long-term revenue driver, the real value could be the evolution
of the platform to incorporate new functionality such as payments,
app distribution, social features ...," Macquarie Equities Research
analyst Ben Schachter said.
[to top of second column]
Facebook has fallen behind in mobile phone messaging apps in
emerging markets, where many are accessing the Internet on
fast-growing 3G mobile networks for the first time on smartphones.
Asian rivals such as Tencent Holdings Ltd's WeChat, Naver Corp's
Line and Rakuten Inc's Viber are well ahead of Facebook messenger
across much of Asia.
Facebook has been buying apps with large numbers of young users as
part of Chief Executive Officer Mark Zuckerberg's strategy of
helping users share any kind of content with anyone.
The company's $1 billion deal to buy photo-sharing application
Instagram in 2012 and its recent $3 billion failed overture to buy
SnapChat — used by teenagers to send texts and photos that disappear
after a few seconds — followed unsuccessful attempts to develop
"Large-scale networks like WhatsApp are rare and provide (a)
significant monetization opportunity (i.e. YouTube) justifying
valuation over time," SunTrust Robinson Humphrey's Robert Peck said
in a note.
Analysts estimate WhatsApp users share 19 billion messages, 600
million photos, 200 million voice messages, and 100 million video
messages per day.
Still, some analysts said Facebook was paying a high price to keep
WhatsApp from being snapped up by a rival such as Google Inc.
"Facebook shares would have been pressured by more than single-digit
percentages in after-market trading if Google had purchased WhatsApp
instead," Stifel analyst Jordan Rohan said in a note.
Pivotal Research's Brian Wieser, who downgraded his rating on
Facebook shares to "hold" from "buy," said he expects Facebook
shares to face pressure in the near-term as investors come to terms
with the risk of future acquisitions.
(Reporting by Soham Chatterjee and Saqib
Iqbal Ahmed in Bangalore; editing by Saumyadeb Chakrabarty and Lisa
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