Friday, February 21, 2014

Trade 1487: Short Facebook after the WhatsApp Acquisition

Short at 66.53

This Facebook trade however is worth blogging about as there are a plethora of valuations that we see going on about the overvalued nature of the acquisition.

Firstly the obvious sentimental argument of the deal being for mostly facebook shares does indicate that FB thinks there the shares are overvalued and the market is responding to such textbook theories; shares off about 2%, I just took a limit position in the pre open trading.  I guess it's good to be living in Australia trading US equities, the last two shorts have been in after hours trading session, the AMZN short also coming favourable trading action in the after hours earnings release.

Back to the quick and dirty valuation of Whatsapp.  Facebook paid about 10%+ for it's market cap for the company about a $16bn+3bn for its stock.  The strategy of Facebook is clearly to buy out the largest nearby social competitors that are a threat to their market dominance.  Instagram at $1bn seems like a bargain.  Even the Microsoft Skype deal for 8.5bn looks very fairly valued compared to this one.  The key number is the 70% of the 400million users, many of which are paying $1 per year.
The starting point for valuation at this figure if you take the perpetuity rate of 5% and 300m paying users, then you'd get about 6bn.  This assumes that the company can survive forever and that there is zero growth. The argument against zero barriers to entry, and the Asian market dominated by other apps (China: Webo, Korea: KakaoTalk) and the biggest free alternative by Google being hangouts, it's unlikely that the market for whatsapp could continue at its current pace.

Despite all these valuation arguments, I've just been looking for spots in the market to get short, in this current upswing, the negative sentiment on this acquisition for Facebook just might tip it lower and I'm looking for a target of about 55 for the easy money, and a retest of 30-35 range.