It’s very frustrating for value investors such as ourselves to watch our largest holding, Apple decline,  almost precisely the absurd amount of money that FaceBook paid for messaging app, Whatsapp.  Whatsapp reportedly had $20 million in revenue and Facebook has paid $16-19 billion depending on how you count it.  I’ve heard all the silly valuation analysis of how Facebook got a good deal at $40 per user, etc when their stock is worth and other social media stocks are trading for much higher valuations per user.  You can’t use one ridiculous valuation to justify another unless you are in a bubble type delusionary environment.  Which is of course, exactly what we are in.   Whenever you have to resort to valuation metrics other than ones that make economic ones like  discounted cash flow or book value metrics, you have a bubble.  They are all the same.  All bubbles end the same, but there is no way of telling how far they rise before they burst.

I found this extract from an interview by Aswath Damodaran that aptly describes this frustration on my part,

“When you are wearing your investor cape, you can be mystified by what traders do and react to, and if you are in your trader mode, you are just as likely to be bamboozled by the thought processes of investors,” he said.

From a long-term investor’s point of view, he finds it difficult to justify the deal. “I realized very quickly that this would not only be futile but frustrating,” he said. Normally for a company to warrant a $19 billion value, it would need to generate about $1.5 billion in after-tax income, Mr. Damodaran said.

WhatsApp is nowhere near that.

What’s more disconcerting is a significant portion of the messaging company’s users are teenagers, which is “terrifying as a business proposition,” he says. “The only group that is less dependable (and predictable) than teenagers is a group of teenagers who text a lot.” From Mr. Damodaran:

“At this stage, if you are an investor, you have two choices. The first and less damaging one is to accept that social media investing is not your game and move on to other parts of the market, where you can find investments that you can justify with fundamentals. The second is to go from frustration (at being unable to explain the price) to righteous anger or indignation about bubbles, irrationality and short term traders to trading on that anger (selling short). I would strongly recommend that you not go down this path, since it will not only be damaging to your physical health (it is a sure fire way to ulcer and heart attacks) but it may be even more so for your financial health. While you may be right about the value in the long term, the pricing process rules in the near term.”

Click below to read the entire interview.

via How to Value Facebook’s $19 Billion WhatsApp Deal – MoneyBeat – WSJ.