This presentation briefly discusses the Fundamental Analysis, Ratio Analysis and Valuation results obtained. This presentation is done by Kandukuri Sai Omkar as a fulfillment of requirement as an equity research intern under Equity Research Initiative of Mentored Research

1. FACEBOOK
Kandukuri Sai Omkar, ERI
BITS Pilani K.K Birla Goa Campus

2. Safe Harbour
The author is not responsible for any inaccuracies of the
values or opinions in the following presentation.

3. Call: SELL

4. Quick Facts
• Company Name – Facebook.inc
• Ticker Symbol – FB (NASDAQ)
• Headquarters – Menlo Park, California, United States
• Year of IPO – 2012
• Number of shares – 2.15 billion shares
• Number of Employees – 17,048
• Industry – Internet
• Chief Executive Officer – Mark Zuckerberg
• Executive Chairman – Mark Zuckerberg

5. Industry Overview
• Over the last decade, social media has evolved from being a mere platform to a part and parcel of
the everyday life of users.
• Several figures indicate that Facebook had 1.79 bn monthly active users as of third quarter of
2016.
• Facebook has a huge user base consisting of users from all ages and regions.
• Updating self with the news has become a most major part of everyone’s life nowadays and
Facebook has given a platform for the news channels and papers to share news and gain users
insights fro the same.
• Recently, Indian telecom regulators handed Facebook a rare loss by effectively banning “free
basics” a Facebook-led program that would have allowed Indian users to access a suite of
mobile internet services, including Facebook, without it counting against their data plans.

6. PEST ANALYSIS

7. PEST Analysis
Political:
• Users and governments have been expressing
privacy concerns which could harm the
company’s strategy to use user information to
deliver effective advertisement
• German data protection official also warned
Facebook investors during its IPO that the
social network’s operational performance is
based on practices that breach European
privacy rules
• Political barriers in the
Chinese market and support
from other governments for
digitalization and
globalization.

8. PEST Analysis
Economic:
• Facebook contributes nearly 15.3 billion $$ value to the European economy and
provides 232,000 jobs across Europe .
• The Facebook App also is a major economy with a €2bn worth and employ 30k people.
• While at IPO in 2012 Facebook shares were available at 38$ per share with 421,233,615
shares making it a 104bn valued company raising a whopping $16 billion through the
offering.
• The revenue growth rates highlight the company’s inherent ability to drive growth,
Facebook being the market leader with strong potential in a relatively underpenetrated
market of social network advertising.
• The company’s high cash flow generation capability indicates that the company enjoys
high financial flexibility. Facebook faces several challenges in terms of monetizing its
reach and drive revenues. The company’s free cash flow position enables it to invest in
expansion inorganically. Facebook will be able to fund its expansion plans at feasible
rates

9. PEST Analysis
Social:
• Facebook help the user to stay in touch with friends, relatives and other
acquaintances from anywhere in the world, as long as there is access to
the internet. A reunion with the help of Facebook was between John
Watson and his daughter after 20 years. They met after Watson found
her Facebook profile .
• Facebook has become a platform to socialize and to connect with
people in different parts of the world.
• It also helps businesses to grow and connect with the customers and
provide better services.
• With the App Center, Facebook is expected to be afore runner in creating
a mobile social experience, a potential market that is largely untapped

10. PEST Analysis
Technological:
• Facebook uses a huge range of services, tools, and programming languages to make
up its back-end.
• At the front end, their servers run a LAMP (Linux, Apache, MySQL, and PHP) stack with
Memory Cache.
• Few tools Facebook developed are Thrift, Scribe and Cassandra(database).
• Estimates indicate that the average click-through rate (CTR), away of measuring the
success of an online advertising campaign for a particular website, of an ad on the
Google Display Network is 0.4% which is estimated to be about 10 times as high as the
typical Facebook ad.
• The comparison suggests that Google currently offers advertisers more value in
terms of both options and results, in comparison to Facebook

11. PORTER’S FIVE FORCES MODEL

13. Threat of New Entrants: (LOW)
• Threat of new entrants in the social network industry is very low.
• The major problem for a new entrant is to face a giant company Facebook which is well
situated in the field with over 1bn users active per month.
• Google+ was the only competitor that worked hard to cope up with Facebook in the race but
wasn’t able to get to Facebook’s standard as many people are already well acquainted with
Facebook.

14. Threat of Substitutes: (Moderate)
• Threat of substitutes is moderate.
• Some countries do have their own social networks such as :
1) Wer- kennt -wen (English: “Who-knows-whom”) – Germany
2) Renren Network (English: "Everyone's Website”) – China
3) VK - largest European social network with more than a 100 million active.
4)Google – All over the world

15. Bargaining power of customers:
Customer - Advertiser.
• Revenue in a quarter - $1.585 billion(2012)
• Revenue from advertising - $1.33 billion (84% of total revenue).(2012)
Customer – User
• Monthly active users - 1.24 bn (2016).
• The user data is used by Facebook for advertising purposes within the site.
• The bargaining power is high when it comes to privacy issues.

16. Bargaining power of Suppliers: (LOW)
Suppliers – Users
• Facebook is nothing without its users.
• The information received from the users (through likes, comments, posts etc) are used by
Facebook ad to push advertises to the user’s screen.
• The bargaining power of user is high due to other social networking sites providing exactly
the same thing as Facebook but with different or additional features.

17. Rivalry in the Industry: (HIGH)
• Competitive rivalry in the industry is low.
• There is no other social networking site with more than 1billion monthly users.
• And most of the social networking sites (like vk.com ,renren.com ,etc) are local
geographically.
• Google+ can be considered as a capable rival but it has only 1/10th of active users when as
compared to that of Facebook’s.

18. SWOT ANALYSIS

19. Strengths:
• Facebook is one of the most successful
companies in the world.
• Market penetration :
1)66% of Internet users in the US.
2)46% in Asia (excluding China)
3)46% in Europe
• Huge increase in income, cash flow and profits
• Market Share – nearly 70%
• Acquisition of WhatsApp - 500 million
• Services
1) Messaging
2) Mobile money transfer.
3) Video chat and calling.
• Companies are using ads to get insights from
customers for newer products to drive more
sales.
Weakness:
• Less number of clicks on ads
• Only Revenue – Advertisements on Facebook
• Attitude towards user privacy
• Minimum website customization
• Weak protection of user information

20. Opportunities:
• Increasing number of people using Facebook
• Expansion to china
• Diversity source of revenue
• Use of Modern Technology
• Open market place
Threats:
• Increasing number of mobile internet users
• Reduction in Ad space in Mobile App
• Users using ad-block extensions.
• Slow growth rate of online advertising.
• Hacks and Identity thefts.

21. RATIO ANALYSIS

22. EBIDTA Margin Net profit margin Return on Assets
• Facebook – 0.45 Facebook – 36.9% Facebook – 15.71%
• Twitter – 0.0539 Twitter - -18.06% Twitter - -6.68%
• LinkedIn – 0.091 LinkedIn – -5.51% LinkedIn - -2.65%
P/E ratio
• Facebook – 33.06
• Twitter –-18.05
• LinkedIn – N/A

23. Price to Sales ratio
• Facebook – 12.03
• Twitter – 4.64
• LinkedIn – 8.88
Return on Equity
• Facebook – 25.74 %
• Twitter - -10.18%
• LinkedIn - -4.26%
Current Ratio
• Facebook – 11.9
• Twitter – 7.97
• LinkedIn – 3.31
Debt to Equity
• Facebook – 0.1452
• Twitter – 0.367
• LinkedIn – 0.2521

24. • EBITDA Margin – Facebook is doing good in comparison to Twitter and
LinkedIn
• Net Profit Margin – Facebook is doing great compared to its competitors.
• Return on Assets – Facebook is leading ahead.
• Return on Equity – Facebook is having highest, hence excessive leverage
which might become a problem in long term.
• Current Ratio – Facebook has a huge current ratio indicating it is paying
its current libities better than its competitors.
• P/E ratio – Facebook has higher P/E shoes higher growth.
• Debt to Equity – Facebook is not over leveraged.
• P/S ratio – Facebook is far ahead of Twitter but close to LinkedIn

25. Historical Stock Performance

26. CAPM
Variables Value
Beta Value 0.7
Rm 15%
Rf 2.26%
Re 11.46983

27. Relative Valuation
Number of Shares Outstanding : 2892 million
Current market price per share : 138.67 USD
Terminal growth rate :5%
Target price : 98.97 USD
Expected return of stock : -29.28%

28. Kandukuri Sai Omkar, ERI
BITS Pilani K.K Birla Goa Campus