Last night I stumbled on a very interesting topic. I was hoping to publish that today, but the news cycle overtook me. The big news today was Facebook’s announced acquisition of WhatsApp. And of course, the real kicker in that story is the price tag – $$4 billion in cash today, $12 billion in stock today, and another $3 billion in stock vesting over four years.  That’s an awful lot of money. To top it all off, the CEO of WhatsApp gets a Board seat at Facebook.

There is no denying that WhatsApp has been phenomenally successful. According to their conference call today, WhatsApp has 450m monthly average users (MAU).  And everyone’s favorite statistic – WhatsApp now handles almost as many messages everyday as all the world’s carrier SMS systems combined. The best summary of all this is @BenedictEvans Twitter feed today where he walks through some of the metrics. On a dollars per user basis, this deal is not that expensive, $19 billion for 450 million users is $42 per user. This is ‘cheap’ compared to the $84 per user for Facebook itself.

Of  course, I use that word cheap with a touch of irony, $19 billion for a company with essentially no revenue is a figure that will leave many people outside the Valley mindset scratching their heads at how upside down the world is. That much money could buy a decent sized oil company, or a mid-sized industrial manufacturer. Coming on the heels of Snapchat reportedly rejecting a $6 billion offer, we are likely to see a wave of headlines in the press in coming weeks  about ‘bubbles’ and Silicon Valley excesses.

There is also going to be a lot of head scratching in the tech industry about business models, and I suspect there will be many people who say that Facebook overpaid. That buying a company with no revenue for $19 billion seems to defy common sense.

Nonetheless, I am willing to believe that WhatsApp is worth that much money. The telecom world is definitely changing, and I think any company that can rival the telecom operators’ scale with a tiny team of engineers is a sign of things to come. I expect more disruption like that. There is clearly value to what WhatsApp has created. The business models of the future are far from firmly defined. Again, if you want to get a sense of WhatsApp’s true potential I refer you to Benedict Evans’ great post on Interactions, Canvases and Ecosystems.

Despite my good opinion of WhatsApp, I think there is an important cautionary note in today’s news. What does it say about Facebook that they are willing to pay 10% of their market cap for this company? Last year, Facebook spent $1.4 billion on research and development. My question is what did they get for that investment? Instagram and Snapchat make that point even clearer. Both of those companies threatened Facebook’s solid position as our photo repository of choice. Many people I know have expressed boredom with Facebook lately, but most of those agree that they cannot abandon their Facebook accounts because they have stored so many photos there.  Instagram and Snapchat seemed poised to threaten that.

So my question is, if Instagram is worth $1 billion, Snapchat is worth $4 billion or $6 billion or whatever, and WhatsApp is worth $19 billion, how much should Facebook be worth? If a team of ten or twenty engineers can pose such a threat to Facebook, doesn’t that imply that Facebook is actually incredibly vulnerable? They are either overpaying for their deals or their business is much weaker than it appears, which in turn implies they are themselves overvalued. To me, it looks like a start-up with a few million dollars in venture funding can topple Facebook.

Yes I know it is not that simple. WhatsApp is not really a defensive acquisition, it is a platform expansion with huge future potential. But if it a company that small can be worth that much, it says that Facebook’s true cost structure is much higher than their financials suggest. Facebook is looking to the start-up community to do their R&D for them. That implies much lower levels of profitability, and hence a lower valuation.

Facebook’s competitors, who presumably bid less than $19 billion for WhatsApp, can look at today’s deal with mixed emotions. They have to worry that Facebook is positioning itself as a major platform for the future, with immense growth potential. But they should also detect a note of fear.