Facebook (NASDAQ: FB) is positioning itself to become a major player in finance and payments in developing nations.
The Social Network plans to roll its WhatsApp Pay solution out to 200 million users in India this week, Bloomberg reported. Indians will be able to send payments supported by three financial institutions through WhatsApp Pay, if the reports are true.
WhatsApp Pay is a peer-to-peer (P2P) payment solution similar to PayPal’s (NASDAQ: PYPL) Venmo that can be added to WhatsApp, the world’s most popular social messaging solution. WhatsApp is the world’s most instant messaging app it had 1.5 billion users worldwide at the end of 2017, Statista estimated.
WhatsApp Pay is designed to make it as easy to send money or pay bills through as it is to send a message via WhatsApp. That means it might be able to reach 1.7 billion people around the world who lack bank accounts. Many of them own mobile phones or smartphones but have no access to a bank.
How WhatsApp Pay can Help Facebook reach the Unbanked
The World Bank estimated the number of persons with no access to banks at 1.7 billion in 2017. Bank use in the developing world is growing dramatically, around 1.2 billion adults have obtained a bank account since 2011, data in the World Bank’s Global Findex Database indicates. Around 515 million adults have obtained bank accounts since 2017.
Around 63% of people of in developing countries now have access to a bank or mobile money service, the World Bank calculated. Facebook hopes to tap that market with WhatsApp.
The moneys that flow through that market are potentially vast. The World Bank estimated the value of remittances; the money that migrants from developing nations send to folks back home, at $537.523 billion in 2016.
The largest market for remittances for is India; where residents received $62.744 billion in 2016, World Bank data indicates. If Facebook can get 10% of Indian remittance recipients to receive them WhatsApp and charges a tiny fee on every remittance say .05%, it can generate a vast amount of cash each year.
Since there are 200 million WhatsApp users in India that is a very realistic possibility. There will be some technical problems in achieving that goal including scalability and security. One advantage to working in India is that the National Payments of Corporation of India takes on those chores in that country. It might also assume some of the liability.
Is Facebook Making Money?
Facebook has famously lost money lost money off WhatsApp since it bought the solution for $22 billion in 2014. That is why services like money transfer and remittances are so vital to it.
Facebook itself can afford to lose money off WhatsApp because it had a gross profit of $10.039 billion, an operating income of $5.449 billion and a net income of $4.988 billion for 1st Quarter 2018. Those moneys came from $11.966 billion in revenues which were mostly generated by advertising.
That gave Facebook a free cash flow of $5.048 billion and an operating cash flow of $7.860 billion for 1st Quarter 2018, according to our friends at Stockrow. This allowed Facebook to accumulate the $43.956 billion in cash and short-term investments it reported on March 31st 2018.
Facebook is a cash-rich company that can afford to lose money on WhatsApp for a long time. It also has a vast amount of money to pump into WhatsApp and make things like WhatsApp Pay start making money at some point.
Facebook is undervalued
Facebook was undervalued at the $190.42 share price reported on 6 June 2018; when Zuckerberg and company’s history of locating and monetizing potentially lucrative businesses is taken into account.
WhatsApp’s social network of 1.7 billion users and the smart way in which WhatsApp Pay is being quietly and carefully rolled out in India make Facebook a value investment. It is a cash-rich company that is potentially itself to take advantage of some potentially incredibly lucrative opportunities.
Facebook is in a good position to become a major player in finance if governments let it. A successful WhatsApp Pay application might grow larger and more profitable than PayPal Holdings (NASDAQ: PYPL) or the privately held Ant Financial. Ant Financial which owns Alipay is probably the world’s most valuable unicorn is worth more than three times what Uber is.
Uber is currently valued at around $48 billion and Ant is valued at around $150 billion according to Reuters. Reuters reported that Ant Financial; which spun off from Alibaba Holdings (NYSE: BABA), was able to raise $10 billion in investment on the $150 billion valuation in May 2018.
Ant’s value estimation makes Facebook into a definite value buy because of its ownership of WhatsApp and WhatsApp Pay. Investors looking for a cash rich growth stock should buy into Facebook. This stock is poised to grow in value and make a lot of money in the next few years.
Facebook definitely has the potential to become a major player in finance. If it works, WhatsApp Pay will be far more disruptive and valuable than Apple Pay ever can be.
This story originally appeared at Market Mad House your barometer for financial insanity.