whatsapp-facebook

Facebook’s (NASDAQ: (FB)) $19 billion agreement to acquire mobile messaging service WhatsApp has caused many investors to question the deal’s staggering price tag and dredge up memories of the dot-com craze.

Facebook shares were down early Thursday in the wake of the announcement but Eric Steiman, who manages the Undervalued Opportunities portfolio on Covestor, was unperturbed by the stock’s reaction and the company paying such a large amount for WhatsApp. Steiman owns Facebook in the Undervalued Opportunities portfolio.

Facebook

FB data by YCharts

“I see the acquisition as a defensive deal but I still like it,” the portfolio manager said. “Facebook is taking away a potential threat and there should be ways to monetize the WhatsApp message platform in coming years. The deal also highlights Facebook’s push into the fast-growing mobile business.”

WhatsApp has a massive active user base that has been pegged at about  450 million and is projected to hit 1 billion in a few years. The messaging service also has strong user engagement.

“User engagement is the new metric that everyone loves, but of course the big question is if that can eventually be monetized,” Steiman added. “Facebook is trying to build a social media empire by previously scooping Instagram, and now they plan to buy the largest messaging service in WhatsApp. It could be argued that Facebook spent more than it could or should have for WhatsApp, but they may have outbid someone else.”

The $19 billion deal includes $4 billion of cash, $12 billion of Facebook shares and $3 billion of restricted stock.

“The WhatsApp acquisition does dilute existing Facebook shares by almost 8% but the stock was down much less than that earlier today so the deal is being received somewhat positively at least for now,” Steiman said.

The bottom line is that Facebook has added hundreds of millions of engaged users by buying WhatsApp. The company’s CEO Jan Koum and Facebook chief executive Mark Zuckerberg have both stated that advertising would not be immediately introduced on the messaging platform. Yet Facebook investors will eventually want to see the deal justified with additional revenue at some point down the line.

Photo Credit: SimonQ

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.