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Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
Facebook's 10-Step Evaluation
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Facebook's 10-Step Evaluation

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  • 1. Facebook  (Nasdaq:  FB)   David  Meier   January  21,  2013   1
  • 2. Investment  Summary  •  Owns  the  largest  social  networking  pla?orm  •  DisrupAng  on-­‐line  adverAsing  •  Young  but  talented  company,  led  by  purpose-­‐ driven  management  team  •  InvesAng  heavily  in  people  and  new  products  •  Buy  Around  $35   2
  • 3. Step  1  –  Define  the  business  •  Facebook  is  an  online  social  network.  •  Purpose:  To  make  the  world  more  open  and   connected  •  How:  To  build  a  pla?orm  and  tools  that   change  the  way  people  share  informaAon   3
  • 4. Step  1  –  Define  the  business   How the Facebook platform creates connections Users Facebook CustomersData Eyeballs Products Analytics Advertisers Developers Users Customers Internal External Agencies Users Businesses 4
  • 5. Step  2  -­‐  Meet  the  managers  •  Mark  Zuckerberg,  co-­‐founder  and  Chairman   –  Sets  the  vision  and  nurtures  the  culture   –  Owns  57.6%  of  the  voAng  rights  (per  prospectus)   –  DusAn  Moskovitz  owns  8.5%  of  voAng  rights  •  Sheryl  Sandberg,  COO   –  Focused  on  execuAon   –  Owns  0.8%  of  shares  outstanding;  negligible   voAng  rights   5
  • 6. Step  2  –  Meet  the  managers  •  Zuckerberg  dreams;  Sandberg  executes    •  Facebook’s  culture   –  The  Hacker  Way   –  Speed;  test  and  learn;  conAnuous  improvement   –  Collaborate  so  the  best  ideas  emerge   6
  • 7. Step  3  –  Market  analysis  •  Total  addressable  market   –  Overall  adverAsing  market  was  $588B  in  2010     –  $55  billion  addressable  ad  market,  according  to   Sheryl  Sandberg   –  Hard  to  give  a  concise  figure  as  Facebook  is   creaAng  a  new  adverAsing  opAon   •  TradiAonal  (print,  radio,  tv)   •  Search  adverAsing  (Google,  Yahoo!,  Bing)   •  Social  adverAsing  (Facebook,  LinkedIn,  Google)   7
  • 8. Step  3  –  Market  analysis  •  CompeAAon   –  Google   –  Twider   –  Amazon.com   –  Angie’s  List   –  Yahoo!   –  Microsoe   –  Yelp   8
  • 9. Step  3  –  Market  analysis  •  Market  direcAon   –  Depends  on  the  perspecAve   –  Ad  market  is  mature  but  subject  to  disrupAon   –  Social  ad  market  is  sAll  being  defined  •  Facebook  is  changing  how  the  game  is  played   –  Huge,  growing  network  of  people   –  CreaAng  an  alternate  pool  of  adverAsees   –  Wants  to  take  share  away  from  other  models   9
  • 10. Step  4  –  IdenHfy  compeHHve  advantage  •  PosiAons   –  Huge  membership  base   –  Network  effect   •  Fosters  connecAons  between  users  for  lock-­‐in   •  Creates  opportuniAes  for  targeted  communicaAons   –  Scalable  infrastructure  •  CapabiliAes   –  Data  collecAon  and  analysis   –  Hacker  culture   •  Data-­‐driven,  test-­‐and-­‐learn  culture   •  BMW  engineers  turn  physics  into  an  experience;  Facebook   engineers  turn  code  into  an  experience   10
  • 11. Step  4  –  IdenHfy  compeHHve  advantage  Facebook’s Value Net Customers Advertisers Local Businesses Developers Gaming users Complements Facebook Substitutes Internet Google Desktop Traditional ads Mobile device Suppliers Twitter Users (data) Hardware/infrastructure Programmers/Hackers Developers 11
  • 12. Step  4  –  IdenHfy  compeHHve  advantage  •  Facebook  gives  users  a  free  pla?orm  to  share   informaAon  •  Facebook  collects  user  data  •  Facebook  sells  adverAsers  access  to  targeted   users  based  on  the  data  collected  •  Facebook  has  found  a  criAcal  mass  of  users   that  conAnues  to  grow  and  the  right  amount   of  interjecAon  from  adverAsers   12
  • 13. Step  4  –  IdenHfy  compeHHve  advantage  •  Sustainable?   –  ImitaAon  –  few   –  SubsAtuAon  –  plenty   –  Hold  up  –  Yes,  if  users  see  ads  as  intrusions   –  Slack  –  yes;  not  every  idea  will  payoff  •  EsAmate  its  compeAAve  advantage  period   –  EsAmaAng  3-­‐5  years   –  Will  adjust  over  Ame  with  new  info   13
  • 14. Step  4  –  IdenHfy  compeHHve  advantage  •  Does  the  data  back  up  the  hypothesis?   –  Limited  financial  data   –  Current  ROIC  would  show  no  advantage   •  Investments  in  SG&A  (sales)  and  R&D  reduces  current   net  income   •  Excellent  cash  flow  gives  cash-­‐on-­‐cash  value  of  18.7%   14
  • 15. Step  5  –  Look  to  the  future  •  Where  is  the  business  today?   –  AdverAsing   •  ~85%  of  revenue   •  36%  growth  during  Q32012   –  Payments:   •  ~15%  of  revenue   •  13%  growth  during  Q32012   15
  • 16. Step  5  –  Look  to  the  future   16
  • 17. Step  5  –  Look  to  the  future  •  Where  can  it  go  tomorrow?   –  User  growth   •  Number  of  users;  average  Ame  spent;  acAvity   –  More  and  more  for  mobile   •  375  million  to  600  million  mobile  users  in  3Q2012   •  14%  of  Q32012  revenue  came  from  mobile;  0%  before   –  New  experiences  for  users   •  The  “Want”  budon;  Graph  Search  (Jan  15,  2013)   –  New  products  for  adverAsers   •  Just  over  26%  of  sales  go  to  R&D   17
  • 18. Step  5  –  Look  to  the  future   18
  • 19. Step  5  –  Look  to  the  future  •  New  products  and  services   –  Rebuilt  the  Facebook  mobile  applicaAon   –  Mobile  App-­‐Install   •  For  developers  to  Ae  into  FB’s  Social  Graph   –  Facebook  Ad  Exchange   •  Purchase  targeted  impressions   –  Custom  Audiences   •  TargeAng   –  Gies   •  E-­‐commerce   –  Offers   •  PromoAons  to  adract  and  keep  customers   –  Promoted  Posts   •  Turn  Page  Posts  into  ads   19
  • 20. Step  5  –  Look  to  the  future  •  Business  drivers   –  Users  in  network   •  Measurable  adverAsing  results   –  Developers  accessing  network   –  Engagement   •  Like,  Want,  Page  Posts   •  Business  profiles   •  In-­‐app  purchases   •  Graph  Search  •  It  all  starts  with  the  ability  to  collect  and  analyze   the  data   20
  • 21. Step  5  –  Look  to  the  future  •  What  opAons  might  Facebook  have?   –  More  products  to  help  improve  targeAng   –  Improved  analyAcs  to  measure  the  ad  results   –  More  e-­‐commerce  opportuniAes   •  Create  an  exchange  between  businesses  and  users   •  Graph  Search  could  create  purchasing  opportuniAes   –  Networks  within  the  network   •  Rolled  out  idea  to  compete  with  LinkedIn   21
  • 22. Step  5  –  Look  to  the  future  •  Confidence  level   –  The  company  has  the  data  to  experiment  with   new  products  and  to  adjust  current  products  to   improve  adverAsing  ROIs   –  As  targeAng  and  ROI  improves,  prices  adverAsers   are  willing  to  pay  can  increase   •  27%  increase  in  the  number  of  ads  delivered  in  Q32012   •  7%  increase  in  price  per  ad  (GOOG  seeing  falling  prices)   –  Very  confident  in  Facebook’s  future   22
  • 23. Step  6  –  Margin  analysis   23
  • 24. Step  6  –  Margin  analysis   24
  • 25. Step  6  –  Margin  analysis   25
  • 26. Step  6  –  Margin  analysis  •  Gross  margins  should  fladen  out  over  Ame   –  Should  stay  relaAvely  flat  over  Ame  •  OperaAng  margins  to  remain  volaAle   –  Considerable  spending  in  SG&A  and  R&D  •  Cash  flow  margins  are  outstanding   –  Low  working  capital  requirements   26
  • 27. Step  7  –  Cash  flow  analysis  •  Source,  uses,  and  needs   –  Sources:  Ad  and  fee  revenue   –  Uses:  R&D,  staff,  compuAng  infrastructure,  and   future  acquisiAons   –  Needs:  Very  lidle  right  now;  cash  rich  following   IPO  •  Facebook  has  plenty  of  capital  to  invest  in  its   future  in  order  to  generate  more  capital   27
  • 28. Step  7  –  Cash  flow  analysis  •  Capital  intensity   –  Medium:  CAPEX  is  ~25%  of  sales   –  Focused  on  compuAng  infrastructure,  including   developing  new  technologies  to  handle  the   incredible  amount  of  data  it  processes  •  Quality  of  earnings   –  Excellent:  generates  lots  of  cash   28
  • 29. Step  8  –  Context   29
  • 30. Step  8  –  Context  •  Most  recent  earnings  release,  conference  call   –  Management  is  clearly  bullish   –  Talked  about  current  and  future  opportuniAes   –  Stressed  mobile  •  Most  recent  investor  presentaAon   –  No  investor  presentaAon  given   –  Gives  slides  during  conference  calls   30
  • 31. Step  8  –  Context  •  Analyst  senAment   –  Analysts  are  moving  from  negaAve  to  posiAve   –  Bulls  outnumber  bears  •  What’s  in  the  news?   –  NegaAve  arAcles  saying  Facebook  is  “overrated”   –  Launched  Graph  Search  on  January  15,  2013  •  A  business  we’d  be  proud  to  own?   –  Yes;  creaAng  a  new  technology  pla?orm   31
  • 32. Step  8  –  Context   32
  • 33. Step  9  –  Risks  •  QualitaAve   –  Live  by  network  effects,  die  by  network  effects   –  People  lose  interest   –  People  do  not  want  to  be  bombarded  with  ads   –  Cannot  create  new  products  that  spur  growth  •  QuanAtaAve   –  Cannot  balance  growth  and  returns   –  Doesn’t  grow  as  fast  as  expected   33
  • 34. Step  10  -­‐  AWracHveness  Analysts estimates from S&P CapIQ 2012 2017 CAGR Sales $4,984 $15,904 26% EBITDA $2,774 $8,659 26% EV/EBITDA 39 15 - 25 Price $30 $49 - $79 10% - 21% EBITDA excludes stock-based compensation 34
  • 35. Step  10  –  AWracHveness  •  Risk/reward   –  100%  -­‐  150%  upside  vs.  20%  downside  in  5  years   –  Does  not  include  opAons  for  future  products   •  OpAons  could  add  50  pts  –  100  pts  of  addiAonal  return  •  Odds  of  success   –  2  to  1   –  Facebook  has  a  compeAAve  advantage   –  Facebook  will  invest  heavily  in  future  growth   35
  • 36. Summary  •  Largest  social  network  •  Huge,  growing  membership  base  •  Developing  new  products  and  services  to   increase  ad  and  payment  revenue  •  ConAnuous  reinvestment  in  the  business  to   improve  user  and  customer  experience  •  Buy  below  $35   36

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