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Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why This Tech Stocks Merger Means Huge Profits

Companies / Tech Stocks Mar 08, 2014 - 02:18 PM GMT

By: Money_Morning


Michael A. Robinson writes: My smartphone plays a vital role in my life.

And I’ll bet the same is true for you.

My two teenaged daughters are active in school, and have busy social lives. My wife is a successful professional. And with my own frenetic schedule – headlined by the work I do here for you – the text messages I send and receive using my Apple iPhone are often my only link to family and friends.

During the past week, for instance, I’ve texted my Mom in St. Augustine, Fla., friends in Denver, in Cabo San Lucas, Mexico, in Detroit and here in the Bay Area.

I use my phone as a data-storage device: It lets me access videos, movies … and my entire music collection.

And my iPhone has also established itself as an important work tool. I use it to track the stocks I’ve recommended, to follow the latest breaking news stories and watch the latest developments in such emerging trends as Cloud Computing, Big Data, the Internet of Everything and Miracle Materials.

The bottom line: My smartphone has become an integral piece of my everyday life.

Smart companies are looking for ways to capitalize on that fact – including one with a “killer app” that is threatening to stand the global telecommunications on its ear.

The company I’m talking about has been independently valued at $19 billion. But it’s been privately held, meaning there’s been no way to invest and capitalize.

That has all suddenly changed.

Thanks to a just-announced deal, this company has access to a whole new set of buyers, meaning it will be able to add to its 450,000-person subscriber ranks – in a big way. Combine all that growth with the belief that this company could radically alter the global telecom system and you have a recipe for big-time profits.

And today I’m going to show you how to cash in.

In fact, the stock I’m going to tell you about could double your money in as little as three years.

A Punchline With Dollar Signs

When Facebook Inc. (NasdaqGS: FB) recently announced it was buying the messaging service WhatsApp for $19 billion, it touched off an avalanche of controversy and criticism.

We saw comments from the usual market pundits and stock jockeys. But with WhatsApp – thanks to the unique name, and the immense purchase price – even the late night comedians stepped up.

This line from new “Late Night” host Seth Myers pretty much sums it all up:

“President Obama has announced that 4 million people have signed up for ObamaCare,” Myers deadpanned. “Obama says he wants to hit 7 million users by the end of March, at which point he’ll sell it to Facebook for $10 billion.”

The point of all these zingers was simple enough. To comedians – and the cable-channel stock jockeys – Facebook’s decision to spend $19 billion on a five-year-old startup with just 55 employees and 2013 revenue of around $20 million just seems, well, insane.

But as someone who’s been watching the tech sector, and who’s watched sector transitions like this one before, I’m going to make a prediction .

Two, in fact …

Facebook founder and CEO Mark Zuckerberg will have the last laugh here.

And if you follow my recommendation … so will you.

Let’s take a look to see why.

Killer Apps

Make no mistake: The WhatsApp deal offers enormous potential benefits for Facebook, which already derives something like 53% mobile ad sales.

And WhatsApp can become the straw that stirs the drink.

The startup has already become a key player the global mobile landscape. With WhatsApp pushing the boundaries of technology, apps are becoming high-tech cash machines.

To understand their value, look at two tech leaders – Apple Inc. (NasdaqGS: AAPL) and Google Inc. (NasdaqGS: GOOG).

In fiscal 2013, Apple had $10 billion in sales from its App Store. And Google, with its ubiquitous Android operating system, dominates the mobile market. Strategy Analytics said Android had a 79% market share last year. And after crunching the numbers, Forbes recently calculated that Google’s app store has enjoyed about 48 billion app downloads over the past several years.

The app market is huge. And apps play a critical role in the world’s high-tech ecosystem.

WhatsApp’s revenue stream model obviously doesn’t approach those of Apple or Google.

In fact, WhatsApp costs nothing for the first year of use and then is just $1 a year after that. But the potential of this platform for Facebook is simply stunning.

This acquisition could bring billions in new sales to Facebook in a very short period of time. If it just captured $1 a month per user in fees, ads and other services, Facebook would post around $5.4 billion in new sales on top of 2013 revenue of $7.8 billion – a 55% yearly increase.

No wonder Zuckerberg has been trying so hard to get into the messaging business. Just last year, he was spurned in a $3 billion bid to buy Snapchat, a messaging service popular with young users.

Running the Numbers

When you compare the price Zuckerberg paid for WhatsApp with the value of another popular mobile product, the acquisition really begins to make a lot more sense.

Twitter Inc. (NYSE: TWTR) is a micro-blogging service that has become a great source of breaking news. Just last Sunday, Twitter received enormous attention when Academy Awards host Ellen DeGeneres tweeted a photo of herself surrounded by several movie stars.

And yet, for all the attention Twitter gets, it still has a user base that’s still only half the size of the one controlled by WhatsApp. But at roughly $55 a share, Twitter has a market cap of $29 billion. In other words, the market says Twitter is 55% more valuable than WhatsApp – with only half the user base.

Fortunately, we have another recent major acquisition by which to model the Facebook-WhatsApp marriage.

Let’s take a look at the recent deal between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group PLC (NasdaqGS ADR: VOD). The nation’s leading wireless carrier paid a whopping $130 billion to buy out Vodafone’s 45% interest in the Verizon wireless venture they owned together.

By that comparison, WhatsApp appears very cheap indeed. Verizon got roughly 97 million active monthly users, paying about $2,980 for each one. With WhatsApp, Facebook adds nearly half a billion new customers for about $42 dollar each.

And remember, Verizon has limited upsell beyond its monthly rates, data plans and roaming charges. But WhatsApp is a leading-edge firm in a new industry with unlimited potential.

In fact, WhatsApp founder Jan Koum plans to roll out a voice service in the next few months. He’s still leery of ads – despite their revenue potential – but Zuckerberg will almost certainly find a way to either host mobile ads or find corporate sponsors whose deep pockets can defray the cost of the user acquisition. And he will add new mobile services.

So there’s lots of upside on the revenue side.

On the flipside, WhatsApp doesn’t have a lot of expenses – it has only 55 employees. Tell me another business that could service more than 450 million dedicated users scattered over several continents with just 55 employees.

That’s actually the whole point of what makes mobile tech so profitable: You can “scale up” a business to a pretty hefty size – while maintaining a fairly small overhead.

This explains why Facebook’s stock is on a roll, rising 147% over the past year. The financials are great because the company is basically transitioning into a full-on mobile play.

The Next Phase

At the end of last year’s fourth quarter, Facebook had 1.2 billion active monthly users, up 16% from 2012. But active mobile users climbed 39% to 945 million, or 77% of its user base.

With a market cap of $172 billion, Facebook trades at roughly $67.50 a share. It has operating margins of 37% and an 11% return on assets (ROA). It has $11 billion in cash on hand and generated $2.85 billion in free cash flow (FCF) last year.

Over the past three years, Facebook has grown its earnings per share by 32%. At that rate, earnings and the stock itself could double in less than 2.5 years.

That would imply a price of about $140 a share before factoring in the lucrative potential of the WhatsApp deal.

Thus, Facebook ranks as a classic growth play. It’s a leader in the new field of social networking that has allied itself with the breakout firm in mobile messaging.

As I see it, tech investors have two choices with Facebook. They can give into the negative hype about this deal from the media and all those TV comedians.

Or they can take advantage of the huge upside and laugh all the way to the bank.

And laugh is what we’re going to do.

Source :

Money Morning/The Money Map Report

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