Back when pre-IPO Facebook announced that it had snapped up the fast growing, 13-employee, photo sharing mobile app start-up Instagram for one billion dollars, lots of eyebrows were raised both in Silicon Valley and Wall Street. More than a few tech industry observers wondered about the business judgment of the wunderkind at Facebook’s helm-Mark Zuckerberg. One billion dollars? For a 13-employee company that lets you share photos on your mobile phone? Seriously? At the time, this acquisition wasn’t exactly looked at as a reassuring move by one of the most heavily anticipated IPOs in the post-DotCom Bust era. Sure enough, the naysayers seem to have been validated by Facebook’s ensuing performance in the stock market-it’s mid-30s debut price quickly gave way to many months of disappointing performance. At one point, Facebook shares were priced barely south of $18. Analysts’ hand wringing about Facebook’s lack of mobile monetization strategy played a key role in depressing Facebook’s price for several quarters.
That was then. This is now. Nowadays, Facebook is trading over $75 a share and indications point to even more share price surges in the future. What a difference a few quarters make. It now turns out that Facebook has a mobile ad strategy after all and, boy, is it paying off! Facebook’s revenues have been growing steadily.
Now comes the most pleasant surprise of all-Instagram might be worth in the neighborhood of $35 Billion. Who knew!? According to Wall Street analyst, Mark May of Citi Financial, the popular mobile photo sharing app’s valuation is due to for a healthy upward reappraisal given the fact that Instagram now has a 300 million total user base. It’s not hard how May got to the $35 Billion price tag-he merely extrapolated it from Facebook’s current $220 billion value and user base. I am not sure that’s the proper way to arrive at Instagram’s cost. After all, Instagram is still in the early stages of actually trying to make money off its audience and data. Indeed, Instagram’s contribution to Facebook’s bottom line is very minimal. Also, Instagram is a one-trick pony compared to Facebook’s business, revenue, content, and promotion models.
Still, May says that if Instagram’s engagement and user levels continue along their current growth rates, Instagram can contribute $2 billion to FB’s coffers. At this stage, it’s quite tempting to look back at Facebook’s 2012 acquisition of Instagram for $1B as a stroke of genius. Of course, we’ve seen the same giddiness before. After all, Yahoo did buy Geocities for a few billion back in the pre-DotCom Crash days. Just like with the Geocities deal, the best way to assess Instagram’s real value is to see how well Facebook shares hold up should there be another DotCom crash. With the Dow reaching new records