19 October 2018

Monthly active users may not be the best tech valuation metric

The recent deal flurry in the internet sector has fueled hopes for a quick build-up in the valuation of WeChat, the instant messaging app of Tencent Holdings Ltd. (00700.HK), sending the share price of the parent company to over HK$600 (US$77.3). The Hong Kong Economic Journal’s EJ Tactics column takes a look at how the stocks are valued and whether the pricing is justified.

Tencent currently owns and operates three main social platforms, namely QQ, QQ Space and WeChat. According to the company, the combined monthly active users (MAU) metric has seen compound annual growth rate of 7.72 percent, from about 1.1 billion users in 2009 to 1.4 billion in 2012.

Further, the third-quarter report last year noted that the MAU of QQ rose 4 percent from a year ago to 816 million. Meanwhile, the MAU of QQ Space climbed 5.1 percent to 623 million and the aggregate MAU of both domestic and international versions of WeChat skyrocketed 1.24 times to 272 million people.

Based on MAU valuation, each monthly active WhatsApp user is worth US$42.22 while the corresponding figure for Facebook is US$142.19.

Applying WhatsApp’s MAU valuation to Tencent’s WeChat would price the Chinese app at US$11.48 billion. The Facebook-like QQ and QQ Space, on the other hand, would be worth a combined US$204.5 billion. The three apps altogether would bring Tencent’s valuation to US$216 billion. Such a high valuation may take the Chinese internet giant’s share price up another 50 percent.

During the previous internet sector frenzy, eyeballs were the new valuation yardstick; but now, it’s MAU.

Amid all the hype, questions remain as to whether the MAU valuation method is fully justified. One should bear in mind the low level of user loyalty to individual instant messaging apps. After all, it only took a day for msn users to shift to skype. Given the constantly evolving technologies and ever-changing user preferences, investors would be well advised not to get carried away. As Tencent shares rise, there is the danger of a bubble.

As for Facebook, its purchase of WhatsApp may in fact be more about fending off a potential rival to its social networking position, rather than the value of underlying business.

– Contact the writer at [email protected]



Freelance journalist

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