Here’s Why WhatsApp Can Become A Multi-Billion Dollar Business For Facebook

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Acquired by Facebook (NASDAQ:FB) for a whopping price tag of $22 billion, WhatsApp is one of the key sources of growth for the social networking giant. WhatsApp’s user base has grown exponentially over the last few years, and recently surpassed 700 million. While Facebook currently generates negligible revenues from WhatsApp, we believe this business could contribute around $7 billion annual revenue over the long-run. We have derived this estimate based on user growth forecasts and on the ARPU that Facebook could derive from WhatsApp in the long-run.

We have conservatively estimated WhatsApp’s ARPU to reach $5.00 by the end of our forecast horizon, based on factors including bench-marking with other messaging applications, strong engagement levels on the platform, and the possible routes to monetization on WhatsApp. WeChat, a key competitor to WhatsApp, has an ARPU of around $7.00, according to Nomura, and we think this could be good benchmark for potential ARPU on WhatsApp. With engagement level of more than 30 billion messages being exchanged each day on WhatsApp, we believe Facebook could potentially earn revenues on this service through several methods including payments, in-app purchases, as well as charges for extra features.

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Benchmarking With Other Messaging Apps

With a user base of 468.1 million as of Q3 2014, WeChat is positioned as the closest competitor to WhatsApp. [1] Though WhatsApp presently earns revenue primarily through $1 annual subscription fee after a limited period of free usage —WeChat is being monetized through an array of features such as advertisements, games, online payment functions, in app purchases, etc. WeChat’s average revenue per user (ARPU) was estimated at $7.00, (as noted) by analysts at Nomura. [2] We think this could be a benchmark for potential ARPU on WhatsApp; its ARPU could possibly even outpace this metric based on solid user growth trends  and network effects with other Facebook businesses.

The ARPU on other messaging applications, including Line and KakaoTalk, stands at about $3.16 and $4.24 respectively, indicating huge runaway ahead in the WhatsApp’s business. [3]

Stellar User Growth And Engagement On The WhatsApp Platform

WhatsApp’s user base has risen at an impressive rate over the recent past — after hitting the 500 million user mark in April 2014, WhatsApp crossed 600 million and 700 million users in August 2014 and January 2015. [4] [5] We expect these high user growth rates to persist over the coming years, owing to increased adoption of mobile Internet throughout the world, coupled with replacement of traditional SMS’s with messaging apps. Hence, we have estimated that average monthly WhatsApp users will reach 1.37 billion by the end of our forecast horizon.

Engagement levels on the messaging platform are also high, with over 30 billion messages being exchanged each day on the app. This translates into more than 40 messages per person per day. These impressive engagement metrics bode well for monetization on the messaging platform.

WhatsApp  Can Be Monetized Through Several Ways Apart From Advertising

While Facebook is in no hurry to monetize the WhatsApp service as it is still prioritizing on user growth on the platform, we believe the company will start deriving meaningful revenues from the messaging platform over the next 2-3 years, once its user base crosses 1 billion. We think payments could be one potential revenue stream on Whatsapp, considering there are reports that Facebook is looking at integrating peer-to-peer payments within its Messenger app, and hence, it could take a similar path for Whatsapp as well. [6]

Apart from this, in-app purchases could also trigger monetization on WhatsApp through both games and stickers, which represent the key sources of monetization on Line and WeChat. Another possible route to monetization could be through charges for extra features such as voice calls, etc. Nevertheless, whichever path is chosen by Facebook to monetize WhatsApp, we believe our $5.00 ARPU estimate for WhatsApp in the long-run is conservative. In the event, this figure turns out to be $15.00 by the end of our forecast period, then it would be a game-changer for FB’s stock, taking our price estimate higher by 20% to $107.

Our $87.52 price estimate for FB’s stock, represents around 10% upside to the current market price.

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Notes:
  1. WeChat growth slows right down as it reaches 468 million monthly active users, Tech In Asia, November 12, 2014 []
  2. WeChat is nothing like WhatsApp—and that makes it even more valuable, Quartz, February 20, 2014 []
  3. Race to the top: the state of chat apps in 5 charts, Tech In Asia, December 11, 2014 []
  4. WhatsApp Hits 500 Million Users, Forbes, April 2014 []
  5. WhatsApp reaches 600 million active users, The Next Web, August 2014 []
  6. Leaked Screenshots Show Facebook’s Move into Mobile Payments, Forbes, October, 2014 []