There has been an extraordinary amount of press about Facebook’s purchase of WhatsApp for $19Bn, as there should be — this is the largest VC M&A exit ever (Skype being the former largest). Sequoia, the sole outside investor, is reportedly generating ~$3.4Bn from a $60MM investment (yes, that’s a 57x return on capital). The deal comes on the heels of Rakuten acquiring Viber, another messaging company for $900MM just days ago. What do these deals say about valuations broadly? While there have been questions if Facebook paid too much for WhatsApp or how this deal compares relatively, there hasn’t been much in terms of quantifying and rationalizing the differences. We also have another data point from Facebook’s purchase of Instagram. If we can analyze the differences between these deals, perhaps it gives us better insight into how to value other similar companies, or maybe just how Facebook values companies…
On the surface, comparing the two messaging deals, it seems that either Facebook paid a lot for WhatsApp or Rakuten paid very little for Viber (4.7x more on an MAU basis). Also, everyone seems to be suggesting that Facebook got Instagram for a steal at $1Bn. We think neither is the case and our analysis demonstrates that the three deals were all done at much closer valuations when you consider growth. First, let’s take a look at the historical growth of the four messaging apps below from BI Intelligence.
Let’s also remember that when Instagram was bought, it had ~30MM users, up from ~15MM the quarter prior. Some quick math shows that from a monthly active user (MAU) perspective, Facebook paid $42/MAU ($19Bn/450MM), Rakuten paid $9/MAU ($900MM/100MM), and Instagram was paid ~$33/MAU ($1Bn/30MM). Why the disparity in valuation? In my opinion, growth — the biggest factor that dictates valuation premiums in Silicon Valley. Over the prior 10 month period, WhatsApp was growing its MAU 125%, Viber 56%, and Instagram 100% (April 2012-Dec. 2011).
Before we dive into the analysis, it’s important to note that paying for growth is nothing new and we see it very clearly in the public markets. Take another technology group, SaaS companies, and you’ll see similar valuation tendencies. Workday, Salesforce, Veeva, and FireEye all trade at significant revenue multiple premiums to their peers and the correlation (r²) is based on revenue growth (see below courtesy of Morgan Stanley research). Let’s also not forget how Twitter got slammed in the market this most recent quarter because they failed to demonstrate the level of growth expected. So it’s no surprise that all we keep hearing is that if you’re a private company that can demonstrate outsized growth, you’ll be sure to get the attention of VC’s. Conversely, if you don’t have growth, it becomes incredibly difficult to raise money or sold at a premium valuation. Regardless, what we’re trying to do with this analysis is quantify how it translates into private consumer Internet company valuations.
If you perform a regression analysis of the 3 deals (we understand 3 data points is not many) with MAU growth and Price Per MAU, the correlation is quite accurate (r²=0.99). So in these cases, MAU growth is highly correlated to how much an acquiror is willing to pay for users. Another similar analysis using what we’re calling a “PMAUG Ratio” (Per MAU:Growth) also shows some interesting results. Dividing the Price Per MAU by the growth rates, we see a PMAUG for WhatsApp of 34, Viber 16, and Instagram 33.
This isn’t too dissimilar to a PEG ratio commonly seen in public companies (Price/Earnings : Growth). While a high P/E ratio may make a stock look expensive, factoring in the company’s growth rate to get the stock’s PEG ratio can tell a different story. The lower the PEG ratio, the more the stock may be fairly/under-valued given its earnings performance. We believe the same applies for a per MAU price.
Our conclusion is that the difference between the WhatsApp and Viber deal isn’t as large as it would seem. Not the 4.7x but closer to a 2x PMAUG difference which could be explained by a variety of strategic factors, including a scale premium. Also, Instagram was purchased at almost the same PMAUG ratio as WhatsApp. Is it possible that Facebook is valuing its targets using this methodology?
While we admit that this is just one analysis with very limited data points, it’s fun to extrapolate. For example, what does this mean for WeChat and Line? Using the regression analysis above, taking into account their respective growth rates, should Line be valued at $8.0Bn while WeChat at $2.4Bn?
Line and WeChat are generating meaningful revenue and have different business models, so there are other ways to value the companies. Also, WeChat’s presence in China is surely of high strategic value. Finally, there’s value in keeping a company out of competitor’s hands. In the case of WhatsApp, Google reportedly offered $10Bn but likely only wanted WhatsApp to stay independent.
Would love to hear what other people have to say about the analysis, whether it’s more data points, flaws, other methodologies, etc. Thanks!