At first, Facebook investors did experience what analyst Arvind Bhatia called "sticker shock" after learning that Facebook planned to shell out $19 billion for WhatsApp, a company that had declared it had no plans to make money any time soon.
But investors quickly shrugged off concerns. Shares of Facebook briefly hit a record high the day after the sale was announced.
Facebook is certainly not alone in placing sky-scraping valuations on unproven start-ups, analysts say.
Blogging service Tumblr sold to Yahoo Inc. for more than $1 billion. Dozens more start-ups are valued at $1 billion or more.
Facebook is quick to point out that WhatsApp reached 450 million users faster than any company in history.
WhatsApp's rapid growth — it adds 1 million users a day — and its hold on users — 70% log into the service every day — "are hard to match," Bhatia said. And WhatsApp is already twice the size of Twitter, which is currently valued at more than $20 billion.
WhatsApp's drawbacks
WhatsApp, like all consumer Internet companies, will be held hostage to people's fickle tastes. And although it may be wildly popular in Europe and Latin America, WhatsApp is overshadowed by rival messaging services in Asia. Line is tops in Japan, and WeChat is the go-to messaging app in China.
Then there's the matter of WhatsApp's strong aversion to the ways consumer Internet companies typically make money, namely through advertising. Koum reiterated that his company would never sell ads, and Facebook co-founder and Chief Executive Mark Zuckerberg backed him up.
Damodaran said it's anyone's guess whether WhatsApp will ever justify its eye-popping valuation."
He said. "The winners here won't be those with the most users. They will be those companies that are successful at converting those users into revenues."
Vocabulary Focus
sticker shock n.
an unpleasant surprise at the high price of something
to treat something as if it is not important or not a problem
valuation n.
the act of deciding how much money something is worth, or the amount decided
aversion n.
a feeling of strong dislike or unwillingness to do something
eye-popping adj.
exciting, amazing or very impressive
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