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Facebook Valuation by Arcstone 2012 02 22

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IMPORTANT: THIS IS NOT INVESTMENT ADVICE. Please read disclosures appearing in the Appendix of this presentation. …

IMPORTANT: THIS IS NOT INVESTMENT ADVICE. Please read disclosures appearing in the Appendix of this presentation.

Arcstone Equity Research is the pre-eminent investment research firm specializing in valuation and investor due diligence relating to emerging private companies. This presentation covers our valuation of Facebook as of February 22, 2012.


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  • 1. The replay of this webinar, which was originally webcast on22 February 2012, can be viewed at the following address: https://www4.gotomeeting.com/register/347775143 Bo Brustkern Managing Director 720-259-0472 bo@arcstoneresearch.com Copyright © 2012 Arcstone Equity Research
  • 2. Arcstone Equity Research exists to bring a bright light into the darkroom of private company market transactions. We specialize inthe research and valuation of high growth private companies. Ourresearch universe includes many companies currently trading in theprivate company market.We serve the deep pools of capital looking to establish positionsin leading private companies. Our clients benefit from privilegedaccess, deep dives and customized investment research.For access to our analysts, please contact me directly at720-259-0472 Quora | Klout | Twitter | LinkedIn Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 3. Subject: Copyright © 2012 Arcstone Equity Research
  • 4. Important disclosures appear in the Appendix.Bo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 5. Forecast Basis Copyright © 2012 Arcstone Equity Research
  • 6. Monthly Active Users (MAUs): rapid growth is behind us. Facebook currently claims 12% of world population as monthly active users. We believe the company will eventually penetrate 22% of world population.Bo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 7. MAU Forecast Chart: asymptote at approx. 1.67 billion You are here.Bo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 8. 22% penetration of world population is reasonable Median 28% Median 20% Source: SocialBakers, 2012 Arcstone estimatesBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 9. Facebook’s Engagement is even more impressive than its Growth Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 10. Facebook’s Engagement is very high Source: AppData, Feb 2012Bo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 11. Facebook’s Powerful Monetization Engine is about to StartFacebook is likely to pursue at least five attractiverevenue initiatives:1. Social Graph Ad Network2. Network Influence Advertising3. Social Graph-enabled Search4. SoLoMo Commerce5. Facebook Credits as a Unified Currency Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 12. Social Graph Ad NetworkHypothesis: Facebook will monetize a web-wide ad network.• Similar to Google’s AdWords, but “Like”-based• Ad relevance will be determined by preferences and relationships• Compare with AdWords, which determines relevance by examining the links between sites. • Google has been a search silo • FB offers a different view on the web’s corpus of information• More than 7 million apps and websites are integrated with Facebook • The Like button is a Trojan Horse • The Like button streamlines cross-internet ad reachNote: FB’s COO, Sheryl Sandberg was one of the original product managers for AdWords at Google. This is the crown jewel of Facebook’s monetizaiton capabilities, which was launched in the fall of 2000. Enabling tech: Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 13. Network Influence AdvertisingHypothesis: Facebook will monetize individuals marketing their passions• This is the logical extension of Like-based advertising • The clout of individuals within networks will enable micro-sponsorships • There is a long tail of valuable opinions based on influence within one’s network • Product endorsements no longer will be the domain of professional athletes and celebrities• The implications for branded companies are significant • Major and minor brands will access true fanatics • The endorsement will come from you • The channel will be Facebook • Revenue share between Facebook and the “sponsored athlete” Enabling tech: Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 14. Social Graph-enabled SearchHypothesis: Facebook will monetize web-wide “social search”• Social is a powerful feature of Search. • Creating relevant personalized search results is very complex• Google is already integrating G+ into search rankings • to reduce the efficacy of search engine optimization (SEO), and • to preemptively develop a social graph-enabled search product• Facebook is well positioned to compete with Google+ in social search • Facebook accesses an entirely different corpus of data • Far more relevant • The result is more personalization• Developing search is very challenging and expensive • Approx 250 of FB’s >3000 people are former GOOG employees. • We believe MSFT’s Bing may provide the backbone for FB’s search Enabling tech: Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 15. Social/Mobile/Local Commerce (SoMoLoCo)Hypothesis: Facebook will monetize its positions in Social, Mobile and Local• Approximately 50% of MAUs regularly use Facebook mobile products• Marketing is most powerful when it is proximate to the purchase • Proximity of time & place• Combining Facebook’s Social awareness with mobility and locality awareness will be a powerful combination • Mobile push notifications about Likes and friends’ Likes to drive activity • Preference alerts: “Live music tonight at the Gorin Bros. hat shop.” • Friends nearby: “Mary Smith is meeting with friends at Joe in Grand Central Market.”Note FB’s fMC event in NY on 2/29: http://www.facebook.com/business/fmc Related tech: Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 16. Facebook Credits as a Unified CurrencyHypothesis: Facebook Credits will become a worldwide currency, extending to mobile p2p payments and replacing PayPal• Currently Facebook has a 30% take rate on all transactions occurring on its website. • This applies primarily to games and in-app purchases • Facebook Credits accounted for 15% of revenue in 2011• We believe Credits can be extended to other offerings on Facebook, the web, and the offline world. • Web-based unified payment platform (a la PayPal) will reduce the friction of payments and increase volume of transactions • The challenge is how to smoothly transition from a 30% take rate to a much lower take rate (~3%). Related tech: Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 17. Forecast Model Copyright © 2012 Arcstone Equity Research
  • 18. In terms of Monetization, Facebook Has a lot of HeadroomBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 19. Core Ad Assumptions for Revenue Build-UpBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 20. Core Transaction Assumptions for Revenue Build-UpBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 21. 2011 Revenue Build-UpBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 22. 2012 Revenue Build-UpBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 23. 2013 Revenue Build-UpBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 24. Zynga’s impact on Facebook’s top line diminishes over timeBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 25. 2009-2013 DetailBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 26. 2009-2011 Revenue Similar to GOOG’s RampBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 27. 2012-2014 Revenue Forecast Lags GOOGBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 28. 2009-2017 Revenue Tracks GOOGBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 29. 2009-2020 Income Statement Forecast DetailBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 30. Forecast Operating StatisticsBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 31. 2009-2013 Revenue/MAU is far below GOOG Benchmark Source: FB S-1, Arcstone estimatesBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 32. 2011-2020 Revenue/MAU remains far below GOOG BenchmarkBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 33. Shares Outstanding and the IPO Copyright © 2012 Arcstone Equity Research
  • 34. IPO Scenario, estimatedBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 35. Pro-forma Diluted Shares OutstandingBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 36. Pro-forma Fully Diluted Shares OutstandingBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 37. CompsCopyright © 2012 Arcstone Equity Research
  • 38. Comparable Companies: Enterprise Value DetailBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 39. Comparable Companies: Enterprise Value MultiplesBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 40. Comparable Companies: Performance per MAUBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 41. Comparable Companies: Ratio Analysis Source: CapitalIQ, consensus estimates and Arcstone estimatesBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 42. Discount Rate Copyright © 2012 Arcstone Equity Research
  • 43. Discount Rate: WACC using Build-Up MethodBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 44. RisksRelevance• Facebook is valuable only if it remains relevant to its user base• Relevance is measured in part by Metcalfe’s Law (size of network)• More important is engagement, including time on site, activity on site, and commerceEngagement• Engagement is determined by Facebook’s ability to provide entertainment value, information value and commercial value to its user base. It will do so by: • Continuing to encourage open sharing on the platform, • Promoting more and richer forms of user generated content (UGC) • Deepening connections and interactions • Limiting network noise, such as spam and poorly targeted advertising • Enabling businesses to serve the user base with relevant offerings Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 45. Risk mitigants• Facebook is the dominant social utility platform• Facebook is only beginning to monetize its market position • Constantly investing in an enhanced user experience • Facebook Connect and Platform are powerful tools for the Internet economy and have significant market share • Facebook is the largest display advertiser in the world • Facebook is already profitably leveraging data gathered from its users and their behaviors, and it has only just begun Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com
  • 46. ValuationCopyright © 2012 Arcstone Equity Research
  • 47. Discounted Cash Flow ModelBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 48. DCF Analysis SummaryBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 49. Valuation Table & Sensitivity AnalysisBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 50. TEV Multiples compared to GOOG circa 2004Bo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 51. Multiples Comparison TableBo Brustkern 720-259-0472bo.brustkern@arcstoneresearch.com
  • 52. Thank you. Bo Brustkern Managing Director 720-259-0472 bo@arcstoneresearch.comCopyright © 2012 Arcstone Equity Research
  • 53. Appendix:Disclosures relating to this Presentation Copyright © 2012 Arcstone Equity Research
  • 54. This presentation is solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Arcstone Equity Research, LLC (“Arcstone”)has not assessed the suitability of the subject company for any person. Nothing in this presentation constitutes investment, legal, accounting or tax advice or a representation thatany investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation to the reader of this presentation. Arcstonedoes not offer advice on the tax consequences of investment. This presentation is not an offer or the solicitation of an offer to sell or buy any security. Arcstone is not a broker-dealer and is not registered as an investment advisor. Any person using this presentation should consult with their financial advisers and independent tax advisers before makingany investment decision.Arcstone is a private company that is not affiliated with Facebook, Inc. Principals and employees of Arcstone do not own any shares of Facebook. However, a principal ofArcstone has been engaged by a third party to advise it and others on the value of Facebook, and the Arcstone principal has provided that advice. The third party and others mayhave entered into a transaction or transactions involving shares of Facebook. The Arcstone principal will not purchase or sell shares of Facebook as part of the transactions.Arcstone believes that the analysis provided by its principal to the third party was consistent with the information provided in this presentation. The analysis provided in thispresentation, however, is based on more recent, and more reliable, information about Facebook than was available to the Arcstone principal at the time the analysis wasprovided to the third party, and therefore the two analyses are not identical.Information and opinions presented in this presentation were obtained or derived from sources Arcstone believes are reliable, but Arcstone makes no representations as to theiraccuracy or completeness. Arcstone accepts no liability for loss arising from the use of the material presented in this presentation. This presentation is not to be relied upon insubstitution for the exercise of independent judgment.Arcstone may have issued, and may in the future issue, other presentations that are inconsistent with, and reach different conclusions from, the information presented in thispresentation. Those presentations reflect the different assumptions, views and analytical methods of the analysts who prepare them and Arcstone is under no obligation to ensurethat such other presentations are brought to the attention of any recipient of this presentation. Arcstone may be involved in many activities that relate to companies mentionedin this presentation. These activities may include business valuation, investment research, and/or advisory services.No representation or warranty, express or implied, is made regarding future performance. Past performance should not be taken as an indication or guarantee of futureperformance. Information, opinions and estimates contained in this presentation reflect a judgment at its original date of publication by Arcstone and are subject to changewithout notice. The price, value of and income from any of the securities or financial instruments mentioned in this presentation can fall as well as rise. Principal is notguaranteed. Equity prices are variable. Investments discussed in this presentation have a high level of volatility. High volatility investments may experience sudden and largefalls in their value causing losses when that investment is realized. Those losses may equal your original investment.This material is not directed to, intended for distribution to, or use by, any person or entity if Arcstone is prohibited or restricted by any legislation or regulation in anyjurisdiction from making it available to such person or entity. The securities described in this presentation may not have been registered under the Securities Act of 1933, asamended, and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registrationrequirements is available.This presentation may not be may be altered in any way, reproduced, distributed, transmitted, provided or disclosed in any manner to any other person, in whole or in part, forany purpose without the prior written consent of Arcstone Equity Research, LLC. All material presented in this presentation, unless specifically indicated otherwise, is undercopyright to Arcstone. If this presentation is being distributed by an institution other than Arcstone, or its affiliates, that institution is solely responsible for distribution. Thispresentation does not constitute investment advice by Arcstone to the clients of the distributing institution, and neither Arcstone, its affiliates, and their respective officers,directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this presentation or its content.All trademarks, service marks and logos used in this presentation are trademarks or service marks or registered trademarks or service marks of Arcstone or its affiliates.Copyright 2012 Arcstone Equity Research, LLC. All Rights Reserved. Additional information is available upon request. Bo Brustkern 720-259-0472 bo.brustkern@arcstoneresearch.com

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