For tech investors today, the eyes have it
They’re betting many users equals profits – eventually
The halcyon days of the Internet appear to be returning as investors are justifying sky-high valuations not on profit, but on “eyeballs.”
Shares of Facebook jumped $1.57, or 2.3%, to a record high of $69.63 on Thursday after announcing the deal despite paying what appears to be a lofty $19 billion for online messaging system WhatsApp. Shares faded a bit on Friday.
Tech investors are increasingly finding ways to justify such lofty purchase prices for Internet companies by looking at how much is being paid for “eyeballs,” or users. Investors are betting mobile In- ternet usage is in such a nascent form that getting the users is the hard part, and finding out how to make money on those users comes later.
“Social-media investors are looking for crazy ways to justify valuations. They’re betting if they have the users, one day what was free will later have a cash register attached with fees or advertising,” says Doug Sandler of Riverfront Investment Group. “Some companies will find the cash register, but most of them won’t.”
By valuing WhatsApp by eyeballs, Facebook got a bargain. By paying $19 billion for WhatsApp, Facebook is buying 450 million users at about $42 each. Compared with the $142-per-user valuation at Facebook, WhatsApp was cheap.
In fact, the valuation paid for WhatsApp is lower than the peruser price on most other Internet darlings. Investors are paying about $84 per user at professional networking firm LinkedIn, $53 per user at review site Yelp and $126 per user of online messaging service Twitter.
Those aren’t even the highest valuations. Investors are paying $409 per user at online review site Angie’s List and $749 per user at online advertising firm Google, based on the 540 million users it reported in its latest annual report.
Due to its ability to mine personal data on its users and sell that data, Google commands a lofty 36 P-E based on its earnings the past 12 months, which is double that of the stock market and the technology sector.
The price Facebook paid for WhatsApp would make it more valuable than roughly half the stocks in the Standard & Poor’s 500 index. WhatsApp’s buyout price values it even higher than Chipotle Mexican Grill, at $17.1 billion, which is a constant target of investors arguing about overvaluation.
But there’s a warning to investors to remember this type of “eyeball” math caused problems during the Internet bubble of 2000. Investors paid unsustainable prices for Internet initial public offerings on the idea that profits would follow users. But for many companies with broken business models, those profits never materialized, and investors suffered some of the most brutal losses in stock market history.
There’s no reason for investors to chase pricey social-media stocks, especially when the broader tech sector is reasonably priced, Sandler says. “You’re paying a high multiple for all these companies,” he says. “We know they all won’t be successful.”