It remains the central mystery of the $19 billion valuation placed on WhatsApp when Facebook bought the company last week: What are the revenue and profit numbers that went into that calculation?
It's no secret that WhatsApp's revenue currently is negligible compared to Facebook's. The app is free but users pay a $1 annual subscription after that. WhatsApp has 450 million users, or thereabouts.
Wall Street analysts and other observers have been conspicuously absent when it comes to suggesting financial models that would justify a $19 billion price tag. (The "math" here is that for the deal to add value to Facebook, WhatsApp must create a business with cumulative margins greater than $19 billion. Hmm.) Privately, most people are just assuming the $19 billion number is just that — a number they agreed upon to move WhatsApp into the Facebook family.
So Sterne Agee analysts Arvind Bhatia and Brett Strauser have crunched the numbers and come up with some realistic revenue and margin numbers for the messaging service. In a recent note to investors, they wrote:
Long-term we think WhatsApp could reach 2B users and generate ARPU [average revenue per user] of $2.50 at 80% margins.
Their estimate is based on some assumptions, including that WhatsApp will reach up to 982 million users by end of 2014 with zero effort to monetize them. They see total revenue of more than $1 billion by 2017.
Here's their chart (below). The pair have a by rating and an $80 price target on the stock. Click to enlarge:
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