Privco Slides - DM Event, FB Valuation

Facebook, Inc. Valuation Analysis

Copyright © 2012 PrivCo Media LLC. All Rights Reserved.

March 20th, 2012

PrivCo – Who We Are

Our Market: Over 90% of Major Corporations Are PrivatePrivate

Public There are over 150,000 firms operating in the United States alone that bring in over $10 million in annual revenues, yet business databases focus almost exclusively on the same 15,000 publicly-traded companies.

PrivCo is dedicated to producing intelligent, in-depth business and financial research on the other 90% of major business.


Selected Major Privately-Held Companies



PrivCo Private Company Financial Analysis


Facebook Strengths

• Stickiness compared to the competition

• High Switching CostsUsers have a high barrier to switching to another network, which can involve rebuilding their own network.

• “network effects”As more users join, the more useful and valuable the network becomes

Facebook Pinterest Tumblr Twitter0

50

100

150

200

250

300

350

400

450

User Stickiness

Avg min/user as of Jan 2012

Avg

. m

in/u

ser


Facebook Weaknesses: Flat Usage

• US unique visitors flat for past several months

• Facebook’s “F-Commerce” Failure: Key brands including J.C. Penny, Nordstrom, and GameStop have closed their Facebook storefront.

• Facebook growth slows in key emerging markets such as China

02/2

011

03/2

011

04/2

011

05/2

011

06/2

011

07/2

011

08/2

011

09/2

011

10/2

011

11/2

011

12/2

011

01/2

012

02/2

012

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Facebook Unique Visitors (USA)

Un

iqu

e V

isit

ors

(m

illi

on

s)


Facebook Weaknesses: Weak User Monetization

– Click through rates among the lowest in the industry

– “display ad syndrome”: Not as effective as search result ads (Google) resulting in lack of context and purchase intent

– Ads on Facebook have been described as approaching a group of friends at a bar and trying to sell them something, a social faux pas.

eBay Google Yahoo Facebook$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Revenue Per User

In short, no amount of demographic ad targeting can change Facebook’s structural advertising issue, limiting its potential for growth.


Facebook Weaknesses: Undesirable Ad Updates

• Introduction of new, more intrusive ad formats is a clear response to poor ad performance

• Total sidebar ads increase to up to 7 slots per page

• New ads on logout page

Facebook’s recent ad changes are one time revenue infusions for its anticipated IPO and following quarters, but will not be repeatable in 2013 and beyond.


Facebook Opportunities

• Virtual Goods Revenue (Facebook Credits): Facebook’s key revenue driver moving forward, represents a possible shift away from reliance on ad model.

• New, more intrusive ad formats could marginally improve ad conversions.

• Facebook is currently under- monetized in emerging markets (e.g. India and Latin America), presenting a potential region for ad revenue growth.

2011 2010 2009$0.00

$500,000,000.00

$1,000,000,000.00

$1,500,000,000.00

$2,000,000,000.00

$2,500,000,000.00

$3,000,000,000.00

$3,500,000,000.00

$4,000,000,000.00

Virtual Goods Revenue Growth

Advertising Revenue Virtual Goods Revenue

To

tal

Rev

enu

e


Facebook Risks• Privacy Issues and User Backlash:

– New, more intrusive ad formats create strong disincentive for users to Like a brand, which may cause brands to re-evaluate the way they advertise on Facebook.

– The added annoyance of the intrusive ads will also create disincentives to add more friends, which adds to the trend of fewer friends per user (now at a meager avg. 150 friends/user).

– These privacy issues prompt users to share less information than previously shared, a huge red flag for any social medium.

Facebook’s recent changes in UI and advertisements may prompt user backlash and advertiser pullbacks, threatening user stickiness factor.


Facebook Threats

• Competition from emerging Social Media Networks including Tumblr, Pinterest, and (to a lesser extent) Google+ with an established and loyal user base.

• Recently announced Yahoo! lawsuit claiming 10 patent infringements on technologies related to advertising, privacy, site customization, and social networking. Yahoo! did the same to Google in 2004 and succeeded in obtaining shares just before Google’s IPO.


Facebook Valuation: Public ComparablesRevenue Enterprise Valuation Rev Multiple

Google $37,905,000,000 $170,493,000,000 4.50

Yahoo! $4,984,199,000 $19,059,049,000 3.82

AOL $2,202,100,000 $1,964,900,000 0.89

Operating Income Enterprise Valuation OI Multiple

Google $11,742,000,000 $170,493,000,000 17.31

Yahoo! $800,341,000 $19,059,049,000 23.02

AOL $45,800,000 $1,964,900,000 37.55

• Using Google’s 4.5x revenue multiple and adding 2.5x for Facebook’s present monopoly on social media gives Facebook an upper limit valuation of just under $26B as of December 2011.

• Using Yahoo’s midpoint operating income multiple of 23x and applying that to Facebook’s 2011 OI pegs Facebook’s valuation at $40B


Facebook Valuation: Projected Financials

2014 2013 2012 2011

Advertising Revenue $8,000,000,000 6,500,000,000 4,500,000,000 3,154,000,000

Revenue from Virtual Goods/Other $3,000,000,000 1,800,000,000 1,000,000,000 557,000,000

Total Revenue $11,000,000,000 8,500,000,000 5,500,000,000 3,711,000,000

Operating Income (Loss) $3,300,000,000 2,800,000,000 2,400,000,000 1,756,000,000

Valuation $77,000,000,000 59,500,000,000 38,500,000,000 25,977,000,000

Price/Share* $41.045 $31.716 $20.522 $13.847

*Based on 1,875,999,533 Shares Outstanding

Using our previous analysis and projected financials up to 2014, we see Facebook’s enterprise valuation at more reasonable revenue multiples.


PrivCo Conclusions

• Facebook has growth opportunities ahead:– Growth and maturity of Facebook Credits and online virtual goods revenue– Possibility of introducing of even more intrusive ads to improve ad revenue performance– Better monetization of emerging and underutilized market traffic, largely overseas– Better mobile ad monetization due to growth in the mobile media space

• However, Facebook has enormous (and largely underappreciated) risks:– User backlash to new ad intrusiveness which may alienate corporate clients– Growth in mobile media consumption means reduced time on Facebook,

never good for an ad based platform– Growth in the space also shortens time per visit, # of ad slots, and losing in Asia – Intense competition from emerging social media upstarts e.g. Pinterest and Tumblr– Facebook faces flattening user growth and decreasing revenue growth

On a risk-adjusted basis, Facebook’s already bloated valuation has little upside, but an enormous downside.

Date post:	12-Jan-2015
Category:	Technology
Upload:	lou-kerner2
View:	467 times
Download:	0 times

Privco Slides - DM Event, FB Valuation

Technology