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 Customers
Data 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
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
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
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
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
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
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
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
