Lost in translation

Korean chat app sends mixed valuation messages

What's the value of mobile chat apps? Investors have been scratching their heads about the topic ever since Facebook slapped a $19-billion price tag on WhatsApp earlier this year. The recent backdoor listing of South Korea's Kakao offers a new data point. But its user metrics and revenue numbers still offer a mixed message on valuation.

Kakao's $3.3 billion listing, through a reverse takeover of Daum Communications, looks like a relative bargain. Based on the South Korean portal's closing share price before the announcement, the deal values Kakao's 145 million registered users at just under $23 each. That looks good when compared to the $40 Facebook paid for each of WhatsApp's active monthly users. But it's more than twice the $9 per registered user that Japanese e-commerce group Rakuten paid for voice-messaging service Viber earlier this year.

Comparing customers is an inexact science: The number of people who have downloaded an app is not the same as those that use it on a monthly or daily basis. Business models also differ. Unlike some rivals, however, Kakao is actually making money from its users. It generated $200 million in revenue by selling games and stickers in 2013 and booked an after-tax profit of $59 million.

Kakao's nearest rival is probably Line, the dominant chat app in Japan. If its 400 million registered customers were valued at the same price as Kakao's, it would be worth $9 billion. Apply Kakao's multiple of 16 times revenue to Line's $338 million of sales in 2013, however, and the Japanese group's implied value falls to $5.4 billion. Investors in Line's owner, the $24 billion South Korean group Naver, struggled to understand the implications of the Kakao deal and sent its shares down four per cent on the news.

Kakao's backdoor listing may have provided investors a glimpse of how investors value a profitable chat app. But on the limited information available, putting a price on mobile chat is anybody's guess.