MINNEAPOLIS (WCCO) — On Wednesday, Facebook announced it would buy WhatsApp, a free texting, picture-sending application popular in India, Latin American and Europe, for $19 billion. WhatsApp was created in 2009 and now reportedly has 52 employees. It brings in some revenue from a nominal $1 charge for some of its 450 million customers.
So, that had us wondering: Why are companies that don’t make money worth billions of dollars?
“It’s a bet. All of these investments are bets,” said Alok Gupta, an information systems economist with the University of Minnesota Carlson School of Management. “But, Facebook, I have to say, has made good bets.”
WhatApp is now valued the same as companies like Macy’s, Whole Foods and the Gap.
“It’s worth that much money because that’s what Mark Zuckerberg had to pay to get it,” said Henry Blodget, CEO of The Business Insider, on CBS This Morning.
Gupta says the valuation of Internet companies are always questionable (remember the Time Warner-AOL deal valued at $182 billion?), but those buying are looking at how quickly the company has grown and will continue its path.
“They must have looked at growth potential and the revenue potential,” he said. “Whether it is worth $19 billion or not, only the future will tell.”
In a conference call with investors, Facebook CEO Mark Zuckerberg said he expects WhatsApp to eventually reach a billion customers. Right now, the startup reports 450 million customers and the addition of 1 million customers a day. Experts say it reaches an international, younger demographic that Facebook is targeting.
“Their growth strategy to penetrate that market,” Gupta said.
In 2012, Facebook spent $1 billion to guy Instagram. That same year, Google spent $12 billion to buy Motorola Mobility. Microsoft had previously bought Skype for $8.5 billion and Apple has never made a deal worth more than $1 billion.