Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Will WhatsApp Destroy Facebook (NASDAQ: FB)?

Facebook’s (NASDAQ: FB) greatest acquisition, WhatsApp, could be the poison that kills the Social Network.

A battle over WhatsApp threatens to rip Facebook apart and destroy Mark Zuckerberg’s credibility. The relationship between Zuckerberg and WhatsApp creators Jan Koum and Brian Acton has deteriorated into all-out war.

Koum and Acton are so disgusted with Facebook they walked away from $1.3 billion in compensation in particular. The Wall Street Journal is reporting that Koum and Acton left without speaking to Zuckerberg.

The social messaging app WhatsApp is critical to Facebook’s future because it has 1.5 billion users. Significantly, most of WhatsApp’s users are outside the United States in emerging nations.

Therefore, Facebook needs WhatsApp if it wants to grow. Without WhatsApp, Facebook probably has no future. In particular, Facebook needs WhatsApp to grow outside the United States.

WhatsApp is what’s wrong with Facebook (NASDAQ: FB)

The WhatsApp battle raises serious questions about Facebook that every investor needs to ask. Those questions include:

  1. Is Facebook committed to privacy? In particular, Acton advised everybody to delete Facebook in a 20 May 2018 Tweet. Tellingly, Acton invested around $50 million of his own money in WhatsApp competitor Signal, The Verge reports.


  1. Who runs Facebook? The Wall Street Journal’s report shows the decisions CFO Sheryl Sandberg made disgusted Acton and Koum. Therefore, Zuckerberg might be a figurehead and Sandberg is calling the shots.


  1. Is anybody in charge at Facebook? There is a strong possibility that nobody is in charge at Facebook.

  1. Is Facebook a classic Warren Buffett value investment? Uncle Warren loves to invest in moneymaking companies “that somebody’s idiot nephew can run.” Surprisingly, Facebook might fall into that category.


  1. How effective is Facebook’s advertising? A federal class action lawsuit called Danielle A. Singer and Project Therapy LLC v. Facebook, Inc. alleges that Facebook’s user base is a hoax.


  1. “For example, based on publicly available data, Facebook’s purported Potential Reach among the key 18-34-year-old demographic in every state exceeds the actual population of 18-34-year-olds,” the lawsuit charges.


  1. Such allegations call Facebook’s business model into question because the company makes most of its money from advertising.

  1. Facebook’s ability to monetize WhatsApp might be limited under those circumstances. In particular, the rollout of WhatsApp Payments in India is being delayed by a dispute between government agencies.


Disturbingly, these questions do not even touch on other potential problems at Facebook. For example, they have not settled the questions that arose from the 2016 U.S. presidential election.

Is Facebook (NASDAQ: FB) a Value Investment?

WhatsApp proves that Facebook is a mess. However; value investors should examine the Social Network, because Facebook is a mess that makes a lot of money.

In the first place, Facebook (NASDAQ: FB) reported revenues of $13.231 billion for 2nd Quarter 2018. Comparatively those revenues were up from $11.966 billion in 1st Quarter 2018.

Equally important was the gross profit of $11.017 billion for 2nd Quarter 2018. The gross profit was up from $10.039 billion in 1st Quarter 2018.

Other great numbers at Facebook for 2nd Quarter 2018, included an operating income of $5.863 billion, a net income of $5.106 billion, a free cash flow of $2.38 billion and an operating cash flow of $6.298 billion.

For all its faults, Facebook is still a moneymaking machine par excellence. Facebook generated $11.552 billion in cash and equivalents and $30.757 billion in short-term investments during 2nd Quarter 2018. That gave Facebook an astonishing $42.309 billion in cash and short-term investments on June 30, 2018.

Why You Should Own Facebook (NASDAQ: FB)

Obviously, Facebook (NASDAQ: FB) is still a value investment. The company generates vast amounts of cash despite all the problems.

The latest financial numbers indicate that Facebook will make a lot of money with or without WhatsApp. Therefore, if WhatsApp flops completely, Facebook will still make money.

Investors that like companies with a lot of cash need to investigate Facebook now. In particular, this stock was a bargain at $160.67 a share on September 18, 2018.

Should Facebook (NASDAQ: FB) Sell WhatsApp?

I think Facebook should sell WhatsApp because the encrypted messenger is a poor fit for Facebook. The two social media’s business models contradict each other.

Facebook’s business model is to generate money by sharing information openly and widely. WhatsApp’s business model is to make transactions and conversations as private as possible.

For instance, Facebook’s monetization by advertising strategy will never work with WhatsApp. On the other hand, WhatsApp’s potential strategy of offering business communications and money transfer by encrypted app will never work through Facebook.

I think Telegram is the future of encrypted messaging because it owns the moneymaking side of that business. For example, WhatsApp’s user is a construction worker in London wants to text his brother back home in Africa. Conversely, Telegram’s user is a businesswoman negotiating a deal in Caracas or Dubai.

Will Encrypted Messaging and WhatsApp make Money?

Comparatively, if there is money in encrypted messaging, Telegram will make it. However, investors will have to wait a long time for Telegram to make money.

I predict that it will take several years for Telegram to figure out how to make money. The cancellation of Telegram’s TON initial cryptocurrency offering (ICO) proves encrypted messaging is a money losing proposition. Consequently, Telegram is refunding the money invested in the ICO.

Therefore, selling or spinning off WhatsApp is a smart move for Facebook at this point. In conclusion, there might be no buyers for WhatsApp, therefore Facebook is stuck with it.

Facebook cannot shut down a service with 1.5 billion users, but it might never find a buyer for WhatsApp. Under those circumstances, Facebook will probably be forced to spin WhatsApp off into an independent entity to get rid of it.

That will cost money but it would be worth it. An intriguing possibility here is a nonprofit WhatsApp Foundation headed by Koum and Acton; that would run WhatsApp as a public service.

Moreover, Zuckerberg is trying to position himself as a philanthropist. On balance, a WhatsApp Foundation sounds like a great piece of charity – that will generate a lot of great publicity in countries like India.

Facebook’s ability to make money after the WhatsApp debacle proves it is a good company. Value investors should definitely investigate Facebook (NASDAQ: FB).