As everyone now knows, Whatsapp.com is "worth" $19 Billion......At $19 billion (including [restricted stock]), Facebook paid a price of $42 per user for WhatsApp. Going by the market valuations for Facebook and Twitter, and the number of average monthly users for Q4 2013, we conclude that the corresponding figures for these companies stand at $141 and $124 respectively. Going by this, the price for WhatsApp doesn’t appear to be too expensive. However, this is just one side of the story. The difference in price per user stems from the fact that Facebook is doing incredibly well financially, and Twitter has shown strong growth in its revenues and EBITDA (earnings before interest, taxes, depreciation and amortization). Both these companies have their monetization model figured out on desktop and mobile. WhatsApp’s revenues are still low in the context of its user base, and its expenses remain unknown...http://www.forbes.com/sites/greatspeculations/2014/02/20/did...In preparation for a lecture to my Business Law students this evening, I researched the issue of company valuation and found the following article from McKinsey & Company's 2nd Quarterly Publication, circa. 2001:Valuing dot-coms after the fall.Authors:Koller, Timothy M.Source:McKinsey Quarterly. 2001 Special Edition, Issue 2, p103-106. 4p.Document Type: ArticleAbstract:This article discusses the valuation of dot-com companies following the decline in the NASDAQ in 2000, stating that the dismal conditions of such ventures should not push companies to abandon the internet as a business tool... The article explains how to spot value creators, stressing the importance of looking at how the company will generate revenue, what will be the average return on capital, and the size of the relevant market.Full Text Word Count:1323ISSN:0047-5394Accession Number:4427015Valuing dot-coms after the fall Investment values always revert to a fundamental level based on cash flows. Get used to it.It was inevitable. Last year's decline in the NASDAQ composite index brought a sudden halt to a heady--some would say reckless--time for investors and acquisition-minded companies, particularly those focused on anything and everything connected with the Internet. Predictably, this slump has now sent the pendulure swinging in the other direction: many investors are staying away from the sector entirely, and established brick-and-mortar companies are scaling back their on-line initiatives. The survival of even leading Internet firms is being questioned.The Internet roller coaster may rank as the market's most dramatic upheaval over the past 20 years, but it certainly hasn't been the only one. Remember biotech? Real estate? Leveraged buyouts? What about Japan Incorporated? Each fad was accompanied by the conviction among market bulls that--somehow, this time-classical notions of value creation, such as approaches that emphasized a company's cash flow, were hopelessly out of touch with the new vision of investing. In fact, investment values always eventually revert to a fundamental level based on cash flows.Although investors and companies can no longer throw money at every dot-com idea, they shouldn't abandon the Internet. As they ponder the reality of a greatly reduced NASDAQ, they should cast a gimlet eye on the real sources of the sector's value. Such an analysis, together with an understanding of the basic principles of value creation, will generate new insights into the potential value of Internet opportunities.Cash flow is kingIn an earlier article on valuing dot-coms, several colleagues and I argued that solid investment analysis has never really been about shorthand metrics such as price-to-earnings multiples or multiples of revenue or traffic. These approaches, in vogue during the Internet boom, do not consider a company's particular characteristics, nor do they account for the way investments in intangible assets (such as the cost of acquiring customers) flow through the income statement rather than the balance sheet.Our approach involved applying a long-term discounted-cash-flow (DCF) analysis supplemented by three twists. First, instead of starting with the current level of performance the usual practice in DCF valuations--start by thinking about what the industry and the company would look like in a state of sustainable, moderate growth, and then work that estimate back to current performance. For Internet businesses, this plateau of economic stability is probably at least a decade away.Second, instead of a single forecast, use probability-weighted scenarios of future performance--an approach that can help highlight the inherent uncertainty in valuing high-growth technology companies. These scenarios should include extreme outcomes, such as very high returns and, conversely, bankruptcy. Finally, use tools such as customer value analysis to understand more fully how value is actually created.Spotting the value creatorsThe development of a fundamental economic perspective for analyzing companies with no profits and negative cash flows must begin with a focus on the way companies create value. The ultimate drivers of value creation are the potential revenue of a company and its ability to convert that revenue into cash flow for shareholders-an ability best measured by its long-term return on invested capital. People who are looking for real value in an Internet sector that has fallen down to Earth can begin by asking three questions.How will the company generate revenue?Getting money from customers is an obvious place to start--right? Yet only a short time ago, investors were buying companies without a clear sense of how they would generate such revenue. The fact is that most of the ways of generating it have already been unearthed. In the business-to-consumer (B2C) market, companies can sell physical products, services, information, entertainment, and financial products; earn revenue from advertising; and collect fees for facilitating transactions. In short, B2C companies must collect their revenue either from consumers or from other businesses that use their sites to reach consumers. Sources of revenue are similar in the business-to-business (B2B) market.Be cautious about business models based on future revenue for anything that people wouldn't pay for today. America Online managed to build its business on membership fees from the start by offering consumers something they were willing to buy. Yet too many so-called lifestyle sites first aim to build a user base and then try to figure out how to generate revenue from sources beyond mere advertising. Similarly, Internet banks that use low prices and little else to lure customers could well see cost-sensitive ones go elsewhere when prices rise...http://web.b.ebscohost.com/bsi/detail?vid=11&sid=63be8f3...With the NASDAQ now having returned to its all-time-high, last reached 14 years ago, it seems odd that a decade-and-a-half has passed and we still see massive amounts of money thrown against the wall in hopes that someday revenues will justify valuations.Just sayin';-)
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