Rohan

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Rohan

  1. 1. Social Media, the Economy, and Shifts in Consumer Behavior<br />Keynote Address at Social Media Insider Summit<br />August 18, 2011<br />Jordan Rohan, <br />Managing Director, Equity Research<br />Internet and Digital Media<br />jrohan@stifel.com<br />212-271-3765; @jordanrohan<br />Stifel Nicolaus does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. <br />All relevant disclosures and certifications appear on pages 25-27 of this report.<br />
  2. 2. Has Facebook Peaked?<br />2<br />
  3. 3. What Does It Mean To Peak?<br />Microsoft has peaked, despite continued record profits. <br />Apple continues upward with <br />Innovative products, consumer imagination…(and record profits)<br />Now is Facebook’s Moment in the Sun… <br />… but moments in the sun can be so fleeting.<br /> Source: Apple’s “Get a Mac” campaign from 2006-2010<br />3<br />
  4. 4. Internet Companies Have Cycles of Popularity<br />Nasdaq Peak in 2000<br />Source: FactSet, StifelNicolaus estimates<br />4<br />
  5. 5. Is This a Peak?<br />December<br />2010<br />Source: TIME Magazine<br />5<br />
  6. 6. TIME Magazine Has a Strong Record of Calling Peaks<br />6<br />Netscape<br />Marc<br />Andreessen<br />February<br />1996<br />Microsoft (peak?)<br />Apple (trough?)<br />Investment in Apple<br />August<br />1997<br />Intel<br />Andy Grove<br />Man of the Year<br />December<br />1997<br />AOL<br />Time Warner<br />“The Merger”<br />January<br />2000<br />Source: TIME Magazine<br />
  7. 7. Magazine Covers Do Not Always Mark Peaks in a Company<br />7<br />Apple Continues to Innovate<br />Amazon Executes<br />Amazon’s<br />Jeff Bezos<br />Person of the Year<br />December<br />1999<br />Apple<br />iPod<br />October<br />2005<br />Apple<br />iPhone<br />November<br />2007<br />Apple<br />iPad<br />April<br />2010<br />Source: TIME Magazine<br />
  8. 8. What Could Change? What Could Make Facebook Become“Establishment” Instead of “Insurgent”?<br /><ul><li> Shift in Economy
  9. 9. Shift in Consumer Preferences - Competition
  10. 10. Shift in Technology</li></ul>8<br />
  11. 11. Markets Digesting a Slower Growth Scenario, Globally <br /><ul><li> Right now, investors are de-risking as the economy moves through a period of de-leveraging. De-leveraging could continue to take years. It is a slow, painful process.
  12. 12. In the U.S., the Fed is running out of stimulative actions: Low GDP growth despite three years of zero interest rates, which are now pegged at zero through 2013. Stubbornly high unemployment.
  13. 13. Europe cleaning up (or holding together) the mess in Italy, Spain, Portugal, Ireland, Greece. Potential reorganization of the Euro Zone would be a destabilizing force. </li></ul>9<br />
  14. 14. More on the Economy – Leverage Remains High<br />Nominal Home Mortgage Debt as a % of Nominal GDP<br />Peak 1Q 2009 at 75.5%<br />‘91 – ‘97<br />Source: FactSet, Federal Reserve, StifelNicolaus.<br />10<br />
  15. 15. We Have Been in Secular Bear Market Since 2000<br />Source: Dow Jones, U.S. Census, StifelNicolaus format.<br />11<br />
  16. 16. After Adjusting for Inflation, the Last 12 Years Has Been Painful<br />Source: FactSet.<br />12<br />
  17. 17. Last Few Weeks Have Seen Extreme Volatility <br />VIX (Fear) Index<br />Spikes Up<br />S&P rallies on QE2<br /> Source: FactSet<br />13<br />
  18. 18. Macro Backdrop Uncertain…Does it Matter for Social Media?<br />Cyclical Influences are more negative than positive: <br /><ul><li>"Rates will remain unchanged, as will credit standards," says Nicholas Stanutz, head of the auto finance and dealer services group for Huntington National Bank. "What most probably will change is consumer confidence.“
  19. 19. “The biggest impact is emotional," David Cosper CFO of Sonic Automotive Inc. "The more people are afraid, the less likely they are to buy something, especially a big-ticket item like a car.“</li></ul>Secular shift towards digital and social media is positive: <br /><ul><li>"Auto dealers not on Facebook are missing the boat because that's where their customers are," he says. "And that's where their customers expect them to be.“ – Matthew Funk writer for TK Carsites
  20. 20. Chuck Capps, Nissan dealership owner, used to spend $25,000 monthly on weekly newspaper, radio and TV advertising. Now he's only spending money online, with $8,000 monthly to TK Carsites.</li></ul>Source: Automotive News, USA Today, August 2011<br />14<br />
  21. 21. Facebook: Key Metrics<br />15<br />
  22. 22. Facebook – Usage Metrics Show High Engagement, Frequency<br />16<br /><ul><li>FB accounts for 37% of all Internet visits and 16% of page views
  23. 23. FB visitors averaged more than one visit per day in July.
  24. 24. Facebook now working with Comscore and Nielsen to measure Internet GRPs. </li></ul> Source: Wall Street Journal, comScore, StifelNicolaus Estimates<br />
  25. 25. Facebook’s Opportunity: Improve Gross Profit per User<br />Key Takeaways<br /><ul><li>Google/Amazon show best GP/User/Year at $63-$72 in the U.S.
  26. 26. Facebook has made progress in GP/User/Year, now up to nearly $18
  27. 27. U.S. Monetization 3-6x higher than International, on average</li></ul>Note: Estimates for LinkedIn and AOL are approximate and based on Consensus. AOL 2001 US Unique Visitors estimate represents 70% of Worldwide, we estimate international revenue was 20% in 2001 and 5% in 2011E. AOL Revenues based on Consensus figures. Facebook revenue estimates based on gigaom.com tied to WSJ and NYT. Yahoo assume 70% US revenue based on historical breakout as are gross margin assumptions. Facebook we assume 65% of $5bn total revenue derived from US and we estimate 85% gross margins. Google revenue estimates based on Gross Revenue percentage splits. Amazon US are representative of North America reported data. <br />Source: Company Reports, ComScore, gigaom.com, FactSet, ThompsonONE, Stifel Nicolaus Estimates<br />17<br />
  28. 28. All Things Considered, Facebook Remains Dominant Platform<br />…Visitor data shows no peak-like characteristics<br /> Source: comScore, StifelNicolaus Estimates<br />18<br />
  29. 29. Despite Facebook’s Popularity, Consumer Sentiment is Mixed<br />Facebook <br />is the only Internet brand <br />to rank among <br />“Most-Hated” <br />Why?<br /> Source: American Customer Satisfaction Index (ACSI) July 2011 <br />19<br />
  30. 30. Successful Launch of Google+<br />Toward the end of July G+ is close to 30mn Unique Visitors… <br /> Source: comScore, StifelNicolaus Estimates<br />20<br />
  31. 31. Is Facebook Vulnerable to a Change in Consumer Preferences?<br /><ul><li>Once “invincible” Internet franchises face increased competition
  32. 32. Historically, consumer loyalty to Internet content properties shifts ~5 years
  33. 33. There is some “fashion risk” in social media, some vulnerability
  34. 34. Switching Costs Matter
  35. 35. Facebook’s implementation of the social graph creates real switching costs
  36. 36. Now that consumers have their social network on Facebook, there is no way they will set up somewhere else. Or will they?
  37. 37. That is why the entry of Google + mattered so much
  38. 38. Google appeared to focus on privacy (circles) in ways that Facebook doesn’t
  39. 39. But Google + alone doesn’t appear to be making a dent in Facebook’s traffic metrics</li></ul>21<br />
  40. 40. Twitter is the Top “Free Agent” in Social Media<br /><ul><li>In our view, Twitter needs a partner
  41. 41. Twitter’s business model has lagged its overall level of influence (significantly)
  42. 42. Google reported to have offered as much as $10 billion to acquire Twitter in the last year*
  43. 43. “Google +” plus Twitter equals social relevancy and real competition to Facebook
  44. 44. Twitter has become the most popular “open” sharing platform
  45. 45. Sharing is part of Facebook’s core, but Facebook network is closed
  46. 46. Mainstream media tells consumers to follow them on “Facebook or Twitter,” interchangeably
  47. 47. Apple and Microsoft would likely also see strategic value in Twitter
  48. 48. Facebook may prefer to have Twitter as an independent competitor</li></ul>22<br />Source: *Google offer for Twitter reported by Fortune Magazine April 14, 2011<br />
  49. 49. Can Facebook’s Valuation Withstand Market Turmoil? <br /><ul><li>Facebook’s value is currently estimated at $86 billion ($35/shr) on SecondShares
  50. 50. But there were reports of a sale by Interpublic this week at implied $66 billion (-23%)</li></ul>Did Facebook’s “real” valuation tick down with overall equity markets? <br /> Source: SecondShares, FactSet, Financial Times, StifelNicolaus Estimates<br />23<br />
  51. 51. Conclusions<br /><ul><li>No, we do not believe Facebook has peaked. The metrics still reflect a dominant platform with high user frequency and activity levels. But some signs exist that hype related to Facebook is peaking.
  52. 52. Facebook will peak some day. Consumers prefer choice and open platforms. Facebook has some shortcomings, including a declining signal-to-noise ratio in its stream. It also needs to improve monetization without alienating its core user base.
  53. 53. Technology and the shaky macro economy / stock markets could disrupt Facebook’sparty as well, even if there is very little direct impact on social media’s fundamentals. The potential sale of Twitter could alter the competitive landscape.
  54. 54. We continue to monitor the economy and the social media metrics closely, and welcome feedback and perspectives. </li></ul>jrohan@stifel.com<br />24<br />
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