Facebook Valuation by Arcstone 2012 02 22

The replay of this webinar, which was originally webcast on
22 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

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the research and valuation of high growth private companies. Our
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Bo Brustkern 720-259-0472
bo.brustkern@arcstoneresearch.com

Subject:


Important disclosures appear in the Appendix.


Forecast Basis


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.


MAU Forecast Chart: asymptote at approx. 1.67 billion

You are
here.


22% penetration of world population is reasonable

Median 28%
Median 20%

Source: SocialBakers, 2012 Arcstone estimates


Facebook’s Engagement is even more impressive than its Growth


Facebook’s Engagement is very high

Source: AppData, Feb 2012


Facebook’s Powerful Monetization Engine is about to Start

Facebook is likely to pursue at least five attractive
revenue initiatives:
1. Social Graph Ad Network
2. Network Influence Advertising
3. Social Graph-enabled Search
4. SoLoMo Commerce
5. Facebook Credits as a Unified Currency


Social Graph Ad Network

Hypothesis: 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 reach

Note: 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:

Network Influence Advertising

Hypothesis: 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:

Social Graph-enabled Search

Hypothesis: 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:

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:

Facebook Credits as a Unified Currency

Hypothesis: 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:

Forecast Model


In terms of Monetization, Facebook Has a lot of Headroom


Core Ad Assumptions for Revenue Build-Up


Core Transaction Assumptions for Revenue Build-Up


2011 Revenue Build-Up


Zynga’s impact on Facebook’s top line diminishes over time


2009-2013 Detail


2009-2011 Revenue Similar to GOOG’s Ramp


2012-2014 Revenue Forecast Lags GOOG


2009-2017 Revenue Tracks GOOG


2009-2020 Income Statement Forecast Detail


Forecast Operating Statistics


2009-2013 Revenue/MAU is far below GOOG Benchmark

Source: FB S-1, Arcstone estimates

2011-2020 Revenue/MAU remains far below GOOG Benchmark


Shares Outstanding and
the IPO


IPO Scenario, estimated


Pro-forma Diluted Shares Outstanding


Pro-forma Fully Diluted Shares Outstanding


Comps


Comparable Companies: Enterprise Value Detail


Comparable Companies: Enterprise Value Multiples


Comparable Companies: Performance per MAU


Comparable Companies: Ratio Analysis

Source: CapitalIQ, consensus estimates and Arcstone estimates


Discount Rate


Discount Rate: WACC using Build-Up Method


Risks

Relevance
• 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
commerce

Engagement
• 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


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


Valuation


Discounted Cash Flow Model


DCF Analysis Summary


Valuation Table & Sensitivity Analysis


TEV Multiples compared to GOOG circa 2004


Multiples Comparison Table


Thank you.

Bo Brustkern
Managing Director
720-259-0472
bo@arcstoneresearch.com


Appendix:
Disclosures relating to
this Presentation


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 that
any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation to the reader of this presentation. Arcstone
does 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 making
any 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 of
Arcstone 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 may
have 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 this
presentation, however, is based on more recent, and more reliable, information about Facebook than was available to the Arcstone principal at the time the analysis was
provided 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 their
accuracy 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 in
substitution 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 this
presentation. Those presentations reflect the different assumptions, views and analytical methods of the analysts who prepare them and Arcstone is under no obligation to ensure
that 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 mentioned
in 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 future
performance. Information, opinions and estimates contained in this presentation reflect a judgment at its original date of publication by Arcstone and are subject to change
without 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 not
guaranteed. Equity prices are variable. Investments discussed in this presentation have a high level of volatility. High volatility investments may experience sudden and large
falls 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 any
jurisdiction 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, as
amended, 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 registration
requirements 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, for
any purpose without the prior written consent of Arcstone Equity Research, LLC. All material presented in this presentation, unless specifically indicated otherwise, is under
copyright to Arcstone. If this presentation is being distributed by an institution other than Arcstone, or its affiliates, that institution is solely responsible for distribution. This
presentation 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.


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