Facebook (FB, Financial)'s acquisition of WhatsApp sent ripples through multiple stocks and BlackBerry (BBRY, Financial) emerged as an unwitting benefactor of the purchase. BlackBerry's shares gained as much 4.3% as the deal pointed towards the potential value of the company's own messenger service called the BlackBerry Messenger, or BBM.
The Deal
Facebook bought WhatsApp for $19 billion, which translates to $42 per monthly active user. Based on this valuation, many investors have started to believe that BBM is worth $3.4 billion. However, this assumption isn't true as valuation can increase or decrease severely depending on the size of the user base. For instance, another chat service, Viber, was recently acquired by Rakuten for $900 million. Viber had 280 million global users, which means it was valued at $3.20 per user. If you base your judgment on this valuation, BBM, which has 80 million users, is worth less than $260 million. BBM's user base is nowhere near as big as WhatsApp; therefore, valuing it at $42 per user isn't plausible as the acquisition cost drastically depends on the strength of its user base. Moreover, bearing in mind that BlackBerry's market cap is nearly $4.7 billion, I don't think any firm will pay $3.4 billion for BBM, especially when the company's most valuable asset is its patent portfolio.
Why WhatsApp's Acquisition Is Beneficial for BlackBerry
In short, I do think Facebook buying WhatsApp is great news for BlackBerry; however, my judgment isn't based on BBM's potential value. I don't think it's possible to predict BBM's actual value, but I do believe that WhatsApp's acquisition will give BBM a much needed boost. Here's how.
WhatsApp users have threatened to boycott the messaging app after the acquisition. There are two reasons behind this. The first reason is advertisements. WhatsApp has gained a very loyal fan following mainly because it refuses to run ads on its service. The home page of WhatsApp's website has two sections: one describing how the service works and the other criticizing advertising, quoting Tyler Durden from Fight Club: "Advertising has us chasing cars and clothes, working jobs we hate so we can buy stuff we don't need."
However, people believe this will change now that Facebook owns it. Facebook started running ads on Instagram just a few months after buying it, and may do the same with WhatsApp. Facebook has become an advertising monster, and it's highly unlikely that it can co-exist with WhatsApp without featuring ads, especially given that Facebook will have to justify the acquisition price.
The second reason behind users dumping WhatsApp is a concern over a potential violation of privacy. This is a much bigger concern for Facebook and can have a massive negative impact on this acquisition. Germany's data privacy regulator, ULD, has suggested that users dump the app. Thilo Weichert of ULD noted:
"Both Facebook and WhatsApp refuse to comply with European and German data protection regulations. Even the NSA access to communications data is facilitated by the purchase."
St. John Deakins, CEO of Citizenme, further highlighted the problem. He said:
"Currently, WhatsApp can change terms and conditions at any time, without notifying users, which many people who use this service aren't aware of. Meanwhile, Facebook already has a very broad copyright license on people's content and already shares your data with many other services.
Now with Facebook buying WhatsApp, this could see more and more private information becoming part of Facebook's database. From a personal data standpoint, this is extremely worrying."
Users fear that Facebook already knows a lot about them and this acquisition has exposed them to spying from NSA and its UK equivalent, GCHQ. Facebook doesn't have a good reputation when it comes to security, as the company unknowingly exposed 6 million users' phone numbers and e-mail addresses to unauthorized viewers for more than one year in 2013.
Why BBM Is Better Now
BBM may be a bit more expensive than WhatsApp in that it might require the purchase of a data plan on BlackBerry devices, whereas WhatsApp users can access these services for free, but it does have certain key advantages. In the present world, privacy and security are paramount. Users are uncomfortable about feeding their data to WhatsApp now that Facebook owns it, and this bodes well for BBM.
BBM is probably the most secure instant messaging app, and it is available across various operating systems. Originally, BBM was only available as an integral part of BlackBerry's smartphones; however, it was released for both Android and iOS in 2013. The launch was a hit and pointed towards the popularity of BBM, as over 20 million iOS and Android users downloaded it within a week of its launch.
In addition, BlackBerry added more features to BBM, giving it a competitive edge over other chat services. The new version of BBM allows users to make free phone calls across platforms. Also, BlackBerry added another new feature called BBM Channels, a forum used for discussing a variety of topics.
Conclusion
I believe BlackBerry is undervalued, especially if you consider the fact that its patent portfolio is worth as much as $3 billion on its own. Moreover, BlackBerry has some fixed contracts for patent royalties that expire this November. This will save the company nearly $200 million and have a positive impact on its cash flow. In addition, it's highly likely that the people who dump WhatsApp will replace it with BBM due to the aforementioned reasons. All of these factors will contribute to BlackBerry's turnaround, and I think investors should buy the stock before it gets expensive.
