It's a Mistake to Scoff at the Facebook Acquisition of WhatsApp

NEW YORK (TheStreet) -- Last Wednesday, Feb. 19, I was casually going over some charts and reading the news when I saw headlines cross my Twitter (TWTR) feed that Facebook (FB) had purchased WhatsApp for up to $19 billion. 

Immediately, I scoffed and thought, What  a mistake this is! 

Sure enough, as soon as the news broke, shares of Facebook moved lower in the after-hours. But as time went by, I thought about it more while researching, and started to think it might not be so bad.

Shares have since popped back up to close at $70.78 on Feb. 24, approaching a 52-week high of $71.44 over the trading day.

I guess I thought the acquisition was a bad idea, because -- let's be honest -- $19 billion is a ton of money. I also don't use WhatsApp, and don't know a ton of people who do. Some, sure. But not a lot. 

Then I started to see graphs of this application's stellar growth, which rapidly exceeded that of Facebook or Twitter. WhatsApp's growth has been very, very impressive.

And Facebook's management seemed confident that WhatsApp -- which is wildly popular in Asia, India, and other parts of the globe -- would eventually reach 1 billion users

We've already seen Facebook, the social media king, reach that level, but if WhatsApp's growth is any indication, it too will hit the coveted ten-digit user base. 

And with 450 million monthly users, it's hard to argue with that prediction. Of those 450 million, 70% reportedly use the service every day. So in a way, Facebook is buying eyeballs. At least in the sense that it continues to purchase companies that have rapidly growing user bases that can eventually be monetized. 

Although Zuckerberg & Co. stated that it does not have any current plans to advertise on the WhatsApp platform, that doesn't mean it will not eventually happen. 

For two reasons, I want to point out Facebook's $1 billion acquisition of Instagram. At first everyone thought it was stupid. Everyone thought Facebook overpaid on the deal. 

That was in 2012. 

Ha! Now most investors consider that deal a bargain, as the younger generation continues to shift off of the Facebook platform and onto Instagram. So perhaps in 2016, everyone will think WhatsApp was a steal too. 

Second, Instagram had no advertising and no real way to monetize when Facebook took over. That all changed, as the platform is now driving cash into Facebook's hands. 

It may also help comfort investors' worries that Google (GOOG) was also reportedly looking to buy WhatsApp. In other words, Facebook wasn't the only one willing to pony up billions of dollars for the company. (Instead, perhaps it should center its M&A efforts on Tesla Motors (TSLA) if it's going to spend that kind of cash).

The real problem I think investors had with this deal was simply the size. That was my problem with it. I thought, How could they spend this much money on a company like this?! It wasn't all that long ago that investors scoffed at the idea of Facebook trying to buy out Snapchat for what's now being viewed as a lousy $3 billion. Now $19 billion? I can see where the hesitation came from. 

(For what it's worth, I'd rather see a $19 billion deal for WhatsApp that a $3 billion -- or any billion dollar -- deal for Snapchat).

As I researched it, I found that WhatsApp was a lot bigger than I had previously thought. It should also help that the company charges a $1 annual fee to its users after the first year. Not huge, but at least it's something. It equates to a few hundred million dollars per year. 

If Facebook didn't buy it, someone else would have. And Facebook won't be cool forever. So it has to make acquisitions like this to stay relevant and maintain its growth rate. Plus, I think we owe Zuck the benefit of the doubt when it comes to snapping up these companies after he made the Instagram deal. It sort of proves he's got a handle on this whole social media thing. 

Perhaps the move will blow up in Facebook's face, but for now, the market is giving it a thumbs up "like."

At the time of publication, the author was long FB, but held no positions in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

-- Written by Bret Kenwell in Petoskey, Mich.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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