Google (NASDAQ:GOOG) has acquired Waze, a social mapping application, for $1.1 billion. While Google Maps is superior in terms of its reach and technology, Waze has caught on with users as it lets them edit maps with relevant social information such as police check post, accidents on road and places to visit. Google had recently overhauled its Google maps application, and this acquisition has further cemented Google’s position in Internet maps vertical. In this article we will analyze Waze’s valuation and also explore why Waze’s acquisition is important for Google.
How Is Waze Valued?
According to Waze’s company blog post, the total user base for Waze has increased from 36 million to 50 million in the last six months.  Google has paid $1.1 billion for acquiring Waze, which translates into $22 for each of Waze’s active user. This might seem expensive, but considering that Waze now has access to Google’s marketing spend and global reach, the growth opportunity at Waze is immense.
Currently, Waze offers its services in USA and Israel, and in the last six months its user base has increased by 39%, which translates into an annualized growth rate of 77%. If we were to assume that Waze will continue to grow at this rate then its user base can increase to 115 million by 2014 and 200 million by 2015. Additionally, if each Waze user were to visit the application twice in a day, 115 million users can generate nearly 7 billion impressions (page views) in a month. Moreover, we believe that not all the impressions can be monetized as Waze charges only if a business’s pin shows up on its map. 
We conservatively estimate that only 50% of these impressions can be monetized, and therefore, Waze can generate $60 million revenues per year based on the current $1.50 revenue per 1,000 impressions rate in the U.S. market. At this rate, Google can expect to breakeven in 18 years. However, with Google supporting Waze with its technology and reach, Waze’s application can be launched quickly in untapped markets across different geographies that can result in increase in the number of Waze users. In such a scenario, revenues from Waze can be substantially higher and Google’s investment can be recovered sooner.
Google’s Rationale For Acquiring Waze
While it is argued that the primary reason for Google’s acquisition of Waze is to keep competitors such as Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) out of the mapping industry, we believe that there is more to this acquisition than meets the eye.
Google Map, although very popular amongst users, has limited functionality with only location and mapping services. Google currently monetizes its maps by licensing APIs to websites.  Google is testing new methods, such as sponsored map icons on the app and Google ad word searches placed next to Google Map to monetize its app.
However, advertisers are apprehensive on spending ad dollars on maps as user engagement is low compared to other venues.  With this acquisition, Google can now incorporate social element of Waze into Google Maps. Additionally, Google can also incorporate some of the Waze’s features such as user edited maps that generate real time information on maps and thus increase its user engagement. With increased user engagement, Google can better market and monetize its app to advertisers. Moreover, Google can also incorporate Waze’s user point reward program to encourage users to edit its maps. These rewards point could then be used for shopping across Google shopping and Google Offers platforms, and further increase revenues from cross-selling products.
We currently have a $802 price estimate for Google, which is approximately 10% below the current market price.Notes: