When the news about Facebook (FB) acquiring WhatsApp broke Wednesday, my Twitter (TWTR) feed was full of stuff like "what is a WhatsApp?" and other questions of that nature. Admittedly, I'm old (40 next month) and I think everyone I follow is old, but it's amazing to me that while 450 million people use this application, none of them are people I know.
Remember that everyone said that Facebook CEO Mark Zuckerberg was crazy when he did a handshake deal to buy Instagram for $1 billion (never mind the corporate governance implications of that deal); I said at the time that he stole it. It turned out to be true. I don't know what kind of valuation you would put on Instagram on a stand-alone basis today, but arguably, it's several billion. Zuckerberg, clearly, is not a typical Wall Street guy who is tight with a buck. He overpays for things, but they turn out to be winners in the long run. Maybe not this time.
Contrary to popular belief, they usually do ring a bell at the top. By any metric, this deal looks ridiculous: $19 billion and 55 employees works out to $375 million per employee and $50 per customer (no ads, teeny-tiny fees). But you have to be careful. It is easy to scoff at stuff like this, but the young folks and tech nerds shake their heads and say things like "You just don't get it." And you know what? Those guys have been consistently right, going back to 2008, when Facebook had a $20 billion private valuation, and people were calling it a bubble back then.
For clarification, I have always been a Facebook bull. I owned the stock, from $32 to $17 to $53, where I sold it. There is nothing like it in the world. It connects all the world's people and stores their photos and everything about their lives. It makes money. But even if it didn't, that piece of Internet real estate is worth boatloads. I sold the stock because, quite simply, I decided I had made enough money. I was still bullish on it, until yesterday.
I get the counter argument. I get it that Facebook is an expensive stock that makes a nifty currency. This deal takes out what would or could have been a major competitor, and could be used to upgrade Facebook's own message offering. And I get that Facebook is becoming a conglomerate of sorts, a Microsoft (MSFT) in the social networking world. I get all those things. But I'm an investor, and very conversant with market history. I haven't seen as many cycles as some people on this site, but I have seen enough, and $375 million per employee is a bubble.
The first rule of bubbles is the first time you hear somebody call it a bubble, it is not a bubble. The second rule of bubbles is that the second, third, or 20th time someone calls it a bubble, it is not a bubble. The third rule of bubble is when everyone is calling it a bubble, it is not a bubble. It is a bubble when hardly anybody is calling it a bubble anymore.
In my estimation, Facebook is in stage three. For perspective, this WhatsApp deal is richer than the leveraged buyout of RJR Nabisco, which was chronicled in Barbarians at the Gate in 1987. And obviously, Zuckerberg is trying to stick it to the Snapchat punk, but still. If I owned any of the big Internet names, I would be very careful. Silicon Valley has achieved levels of opulence that far exceed what was going on 15 years ago. The market has the memory of a goldfish.