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Investment Overview for Facebook (FBOOK)
DISCLAIMER
Facebook is a private company. Our analysis of Facebook is based on limited, publicly available information and our own estimates. You can refer to the “How we got historicals” section for any forecast to learn about where we source our information and how we’ve estimated unavailable information.
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- Text & Display Ads constitute 60% of the ${trefisprice}
- Credits on Games & Applications constitute 17% of the ${trefisprice}
Our estimate for Facebook’s per share price is based on 2.34 billion shares outstanding. This figure is based on the 2.268 billion shares as reported by
sharespost.com, an online marketplace for private investments, plus the shares issued as a result of the $500 million investment by Goldman Sachs and Digital Sky announced in January 2011 as well as the $1 billion invested by private clients of Goldman Sachs. The number of shares issued is determined based on a $50 billion pre-money valuation and implies about 68 million new shares issued. For the purposes of our analysis, we have assumed that 100% of the new $1.5 billion investment is based on new issuance rather than the purchase of existing shares. See further down below for details related to our estimate of Facebook’s net cash balance.
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Below we highlight key drivers of Facebook’s value that present opportunities for upside or downside to the current Trefis price estimate for Facebook.
Facebook Text & Display Ads
- Monthly Unique Visitors to Facebook: We estimate that Facebook’s average monthly unique visitors has increased from around 19 million in 2006 to 340 million in 2009, and it could continue to increase to more than 2 billion by the end of the Trefis forecast period. The availability of Facebook in large markets like China, where it is currently blocked, and the improvement of privacy controls on Facebook will be important in achieving such growth. With about 4.2 billion internet users worldwide expected by the end of our forecast period, there is room for additional upside for Facebook. There could be an upside of more than 40% to the Trefis price estimate for Facebook’s stock if the number of unique visitors were to increase to around 3 billion by the end of Trefis forecast period.
- Page Views per User on Facebook: We expect Page Views per User to increase from around 415 per month in 2010 to about 470 per month by the end of Trefis forecast period. Facebook has taken a few initiatives of late to improve the engagement on its site. These initiatives are: 1) Encourage users to upload more photos, which creates a viral effect among user’s friends, 2) Facebook’s e-mail feature, which is expected to draw more user engagement and 3) Increasing number of applications on Facebook as applications become part of the user’s news feed making it more likely that other users who view his feed will take actions on the same applications. There could be an upside of about 15% to our valuation for Facebook if page views per user increases to around 550 per month by the end of Trefis forecast period, instead of the 470 that we forecast. On the other hand, there could be a downside of about 10% to our valuation for Facebook if page views per user remain stagnant at 410 per month by the end of Trefis forecast period.
Search Advertising.
- Facebook’s Search Market Share: Facebook’s search market share is expected to increase from 0.9% in 2008 to 1.9% in 2010, and we expect it to increase to around 5.6% by the end of Trefis forecast period. Facebook’s partnership with Microsoft will enable Facebook to use Microsoft Bing technology, thereby providing more relevant search results to the user. If Facebook can take some search market share away from Google, and if its market share were to increase to around 10% by the end of Trefis forecast period, there could be an upside of 10% to our valuation for Facebook.
For additional details, select a driver above or select a division from the interactive Trefis split for Facebook at the top of the page.
Besides the Trefis valuation for Facebook and the recent investment by Goldman Sachs and DST, there have been a variety of other valuation benchmarks for the company. For example, in December 2010,
BusinessInsider quoted Wedbush Morgan analyst Lou Kerner estimating that Facebook could valued at $200 billion by 2015. In August 2010,
CNN quoted reports from Next Up Research (from earlier in 2010) indicating a valuation of $11-13 billion. Recent trading activity on secondary markets such as SharesPost and SecondMarket suggest a valuation of greater than $50 billion for Facebook. See our
4 Key Businesses That Determine Facebook’s Valuation for a detailed comparison of the Trefis valuation for Facebook with other valuations.
${header:summary}Facebook is a popular social network that helps people connect with family and friends. The company makes money primarily through display advertising. In addition, Facebook facilitates the purchase of virtual goods in games and applications running on Facebook’s platform through its Facebook Credits, a virtual currency. Facebook also generates a significant number of internet search queries and earns search ad revenues as a result.
${header:sourcesofvalue}We believe that the Text & Display Ads business is the primary source of value for Facebook for the following reason:
Facebook Social Ads are primarily self-serve ads that appear on the right hand column of most Facebook pages and can be highly targeted to appear to specific users. The Facebook ad system is primarily self-serve and provides real-time feedback on the size of the target audience and the suggested bid range to achieve impressions. The system is based on a live auction model, which means that the more advertisers are willing to spend per impression, the more frequently their ad will appear. The Facebook self-serve ad system offers very powerful targeting capabilities: when advertisers create an ad, they have the option to limit who sees the ad by age, sex, location, keywords, education level, workplaces, political views and relationship status. Facebook Social Ads are limited in that they contain only a small static image and a few lines of text.
Facebook gives advertisers the opportunity to advertise on its website pages, and target users based on demographics such as age, gender, education and location. These advertisements show up on the Facebook site pages alongside profile and other user related data. Facebook also allows large advertisers to form custom fan page profiles. Custom fan page is an effective form of advertising as it allows users to send stories related to an advertisers’ custom fan page to their friends via news feed. This creates viral effect and is an effective marketing tool for advertisers.
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Better demographic targeting based on user information and activity will lead to higher ad prices on FacebookFacebook allows for targeted advertising based on user demographics. We expect this will lead to higher click-through ad pricing as focused targeting will prompt advertisers to bid for higher amounts to ensure display of their advertisements
Increasing number of ads per pageFacebook mostly displayed three ads per page from 2006 until the fall of 2010 when it increased this to four ads per page. We expect that Facebook will continue to increase the ads per page over time and that this will have a positive impact on average ad revenue per page
Growing Search activity on Facebook
The number of searches on Facebook has grown at a fast rate from around 900 million in July 2009 to 1.6 billion in Dec 2009, as per Comscore. This growth is faster than Google, although Facebook search growth comes off of a smaller base. Interestingly, the number of searches on Facebook has surpassed AOL. As of July 2009, the number of searches conducted on AOL was more than a billion. However, in December 2009, the number of searches conducted on Facebook surpassed 1.5 billion.
Growing Revenues from Games & Applications
People buy virtual goods on games like FarmVille and Mafia Wars using Facebook’s virtual currency called Credits. During 2010, Facebook Credits became the exclusive payment method for most of the games created by Zynga, the No. 1 developer of Facebook applications. Over time, the company plans to turn Credits into a system for micropayments that could be open to any application on Facebook.
FACEBOOK’S CASH BALANCE
In March of 2009,
BusinessWeek reported that Facebook had drawn down about $60 million of a $100 million credit line from TriplePoint Capital. In May of 2009, Facebook
raised $200 million from Digital Sky Technologies.
BusinessInsider indicated in September of 2009 that Facebook became cash flow positive in Q2 of 2009, the same quarter as the investment from Digital Sky. Of the $416 million in equity funding that Facebook received prior to Digital Sky’s investment, we estimate that Facebook had about $50 million in cash left during the period in which it became cash flow positive.
Based on this, Facebook’s net cash by the end of Q2 2009 would have been about $190 million ($50 million cash on hand plus $200 million Digital Sky investment, less $60 million debt). We believe that Facebook has been reinvesting the bulk of the cash it generates back into the business and we have not tried to account for any additional increases in its cash balances since becoming cash flow positive. Furthermore, we have increased Facebook’s cash balance by $1.5 billion based on the investment by Goldman Sachs, Digital Sky and private clients of Goldman Sachs announced in January 2011. Consistent with our adjustment to Facebook’s share count based on this investment, we have treated 100% of the investment proceeds as cash to Facebook based on the issuance of new shares.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
DCF MethodologyView All Help Topics
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