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Shares of Facebook Inc. (FB - Analyst Report) hit a new 52-week high of $70.11 on Thursday, Feb 20, 2014, after it announced the acquisition of WhatsApp. The closing price of Facebook on Feb 20 was $69.63, representing a strong one-year return of about 155.2% as compared with the 22.5% return from the S&P 500.

Facebook delivered a positive average earnings surprise of 20.7% over the past four quarters. This Zacks Rank #2 (Buy) stock has a market cap of $167.08 billion and a long-term expected earnings growth rate of 31.0%.

Facebook Buys WhatsApp

Facebook is buying WhatsApp for $19.0 billion ($4.0 billion in cash, shares worth $12.0 billion and restricted stock units worth $3.0 billion). The acquisition reflects the company’s eagerness to maintain its position as the leading social network platform.

The buyout not only expands Facebook’s mobile product line-up but also adds a user base, which is predominantly young. Facebook fatigue among teenagers has been a growing concern for the social-network in recent times.

However, most significantly, the acquisition eliminates Facebook’s fastest growing competitor in terms of user additions. Within a short span of five years, WhatsApp has garnered 450 million users as compared with Facebook’s 145 million, Twitter’s (TWTR - Analyst Report) 123 million, 123 million by Google’s Gmail and 52 million by Microsoft’s (MSFT - Analyst Report) Skype.

WhatsApp’s soaring popularity among users (particularly youngsters) primarily lies in the fact that it does not threaten their privacy. Unlike Facebook, the messaging app does not collect information like name, gender, address or age. The company also does not promote games or provide e-Commerce services as offered by some of its peers.

Facebook plans to keep WhatsApp independent, as it did with Instagram. WhatsApp will continue to enjoy full autonomy over day-to-day operations, its future product line-up and monetization efforts. Facebook intends to assure WhatsApp users that their privacy will not be compromised in the long run.

However, this policy is quite baffling. WhatsApp developers are known for their aversion to advertising, which is Facebook’s primary source of revenues. Facebook’s ability to track personal details of its massive user base makes it a formidable force in the online ad market.

Moreover, WhatsApp’s only source of revenues is the paltry $1 it charges users as annual subscription fee. We believe Facebook’s monetization policy regarding WhatsApp is unclear. The company is paying an acquisition price of $42.2 per user, much higher than $33.3 per user ($1.0 billion for 30 million users) paid for Instagram.

Unless Facebook finds some other way to monetize the service, it may be hard to justify the hefty acquisition price.

Nevertheless, the takeover will help Facebook improve its penetration in Europe, India and Latin America, where WhatsApp has a strong presence. Thus, we expect the company’s international revenue per user to increase at a faster rate, going forward.  

Estimate Revision

The Zacks Consensus Estimate for the first quarter increased 2 cents to 17 cents over the last 30 days. For fiscal 2014 and 2015, the earnings estimate surged 10 cents and 16 cents to 98 cents and $1.39, respectively, over the same time frame.

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