financial ealuation of Facebook IPO

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FACEBOOK IPO
CFGB610 - Corporate Finance
Prepared by :
Alireza Khosroyar CGA110033

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Agenda :
 Company Description
 Financial information
 How Facebook makes money
 How much Facebook is worth
 Facebook valuation calculator
 Facebook IPO
 Compare to industry
 reasons to not 'like' Facebook's IPO

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Company Description
• The firm was launched in 2004 byHarvard student Mark Zuckerberg as an
online version of the Harvard Facebook.
• Facebook lets users share information, post photos and videos, play games,
and otherwise connect with one another through online profiles.
• Facebook has about 850 million total users and about 480 million daily users.
• the company had 3,200 full-time employees as of December 31, 2011.
• That was a 50% increase from the previous year, and Facebook expect this
growth to continue for the foreseeable future.

4. 4Financial information

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2007 2008 2009 2010 2011
ARPU
ARPU :
Average Revenue per user

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• The company crossed the line into profitability in 2009, five years
after it launched in founder Mark Zuckerberg's Harvard dorm room.
Facebook earned $229 million that year on sales of $777
million, and has remained profitable ever since.
Financial information

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How Facebook makes money
- Advertising :
• 85% of Facebook's 2011 revenue, almost $3.2
billion, comes from advertising.
– ( a combination of search and display ads)
• Facebook has grown by grabbing market share from
Google and Yahoo. Last year:
– Facebook 16.3% of market
– Yahoo's 13.1%
– Google's 9.3%
• research firm eMarketer estimated last September
that Facebook's ad revenue will increase another
52% in 2012.

8. 8How Facebook makes money
- Apps and games:
• Facebook allows outside developers to build apps that integrate with Facebook
• Facebook Credits is a payment system for purchases within apps and games
Facebook keeps 30% of the revenue from those payments, and passes the
remaining 70% on to the app developer.
• Revenue from Zynga, which makes FarmVille and other games
played on Facebook, represented 12% of Facebook's total revenue
in 2011.

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How much Facebook is worth ?
• He expects Facebook will be valued at
$85 billion to $100 billion
• But the value of Web companies can be changed quickly.
• A recent example: Zynga ,The FarmVille maker's
it valued its shares in at $17.20 each, which gave the company a valuation
of $14 billion. But when Zynga went public , shares sold for just $10
valuing the company at $7 billion.

10. 10Facebook valuation calculator
This interactive calculator is a
basic two-step discounted cash
flow model to help illustrate
how variations in key
assumptions can change the
potential market value and
share price of an IPO.
http://www.ft.com/intl/cms/s/2/ff589e40-8d3a-11e1-8b49-
00144feab49a.html#axzz1uARcyPjm

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Facebook IPO
• Facebook set a price range of $28 to $35 per share for its initial
public offering. It also upped the maximum size of its offering to
$13.6 billion, up from its previous $5 billion estimate (May 3, 2012)
• Facebook will sell about 8.5% to 10% of its available shares in the
offering. Based on those estimates, Facebook would raise between $7.2
billion and $10 billion from the sale of its stock.
• To justify its stock price today, Facebook would need to record $68
billion in sales by the end of 2022 -- a 34% compound annual growth
rate (CAGR) for a full decade, assuming it maintains its current
margins

12. 12Facebook IPO

13. 13Facebook IPO

14. 14Facebook IPO

15. 15Compare to industry
• At $100 billion, Facebook would trade at 27 times last year's sales
($100 billion/ $3.7 billion= 27)
Google trades for just 5 times trailing sales
Apple trades at only 4 times last year's sales.
• At $100 billion, Facebook would give it a price-to-earnings ratio of 100
($100 billion/ $1 billion= 100)
Google is valued at about 20 times its 2011 profits.
Microsoft is trading at only 11 times its net income for fiscal 2011.

16. 16Compare to industry
• let's assume that Facebook's profits increase 65% in 2012, A $100 billion
market value would imply a P/E of about 60 on 2012 earnings forecasts.
P/E on 2012 ($100 billion/ $1.65 billion= 60 )
• Think about Google. Right now it's trading at around 20 times earnings.
That's a modest multiple and that's ultimately where Facebook may
deserve to be," Robak said.
• A P/E of 20 times the 2012 earnings forecast gives you a market value of
$33 billion.
Market value= $1.65 billion x 20= $33 billion
• But even if we give Facebook a fat premium of say, 40 times earnings, you
still only get to a value of $66 billion.
• IT means : that investors are betting on the next few years,
• not the past few.

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Conclusion :
reasons to not 'like' Facebook's IPO
1- Slowing growth? Already?
• Facebook's sales increased suddenly for the past few years.
• Revenue rose by more than 150% in 2010. Sales were up nearly 90% last
year. But in the first quarter of 2012, revenue was up just 45% from the
same period a year ago
• Facebook's first quarter sales fell 6% from the fourth quarter of 2011

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2- Rising expenses
• Facebook says in its IPO filing:
– “Building great things means taking risks. This can be scary and prevents most
companies from doing the bold things they should. However, in a world that's
changing so quickly, you're guaranteed to fail if you don't take any risks.“
It can be seen :
– Net income fell 12% in the first quarter as costs and expenses doubled from a
year ago
IT means:
Facebook investors should be prepared for the company to make more big
purchases; Facebook admitted as much in its IPO filing
Conclusion :
reasons to not 'like' Facebook's IPO

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3- Facebook is a media company
Facebook generates most of its money from advertising
AND
That is a changeable and inconsistent business
- ARPU (average revenue per user ):
Facebook : $1.21 in the first quarter of 2012
EBay : $12 in the first quarter of 2011
Conclusion :
reasons to not 'like' Facebook's IPO

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4- Everybody is gunning for Facebook
- Facebook will not remain the undisputed leader in social forever.
Competitor and risks:
- Twitter
- Google+ (a company that has $49.3 billion in cash .That's almost 13
times the amount Facebook has.)
- if Facebook does decide to bulk up in China, it will face intense
competition (Tencent, Sina and Renren )
- LinkedIn (professionals are using that site, and not Facebook)
Conclusion :
reasons to not 'like' Facebook's IPO

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The demand for the Facebook IPO will
probably be so hot that investors will buy
first and ask questions later