Recommendation:
Buy
Presenters: Jason Johnson & Mike Saeks
February 15, 2013
Facebook’s Valuation $28.62
Discounted Free Cash Flow Assumptions
Tax Rate
32.00% Terminal Growth Rate
Risk Free Rate
2.50% Terminal Value
Beta
1.7, 1.6, 1.5, 1.4, 1.3, 1.2 PV of Terminal Value
Market Risk Premium
5.46% Sum of PV Free Cash Flows
% Equity
97.63% Firm Value
% Debt
2.37% Total Debt
Cost of Debt
1.46% Cash & Cash Equivalents
CAPM
9.05% Market Capitalization
WACC
8.87% Fully Diluted Shares
Implied Price
Current Price
Undervalued
Considerations
3.00%
88,306
37,742
20,173
57,915
1,562
9,626
65,979
2,166
30.46
28.10
8.40%
Final Implied Price
Method
Implied Price
DCF
$30.46
Forward Comp Model 1
$24.91
Forward Comp Industry
$23.77
Price Target
$28.62
Current Price
$28.10
Undervalued
1.86%
Weight
70%
15%
15%
Why Facebook Is a Buy
› Market Penetration
– Brand
›Mobile Monetization
›Smartphone Growth
Market Penetration
Daily Active Users
Monthly Active Users
(In Millions)
(In Millions)
700
600
500
483
526
552
618
584
1200
1000
845
901
955
1007
1056
800
400
600
300
400
200
200
100
0
0
Dec '11
Mar '12
Jun '12
Sep '12
Dec '11
Dec '12
Mar '12
Jun '12
Top U.S Mobile Apps Ranked by Unique Visitors
Source: comScore Mobile Matrix, Dec. 2012
Facebook
85574
Google Maps
74631
Google Play
61461
Google Search
Gmail
YouTube
Pandora
60587
53934
52572
48023
Sep '12
Dec '12
Mobile Monetization
Percent of Revenue from Mobile
23%
25%
20%
14%
15%
10%
4%
5%
0%
0%
Q1 '12
Q2 '12
Q3 '12
Q4 '12
Smartphone Growth
Worldwide Smartphone Shipments 2010-2016
Shipments in Million Units
1600
1405.3
1400
1254.6
1200
1088.6
916.8
1000
717.5
800
600
400
494.5
305
200
0
2010
2011
2012
2013
2014
2015
2016
Effectiveness of Ad Spend – 60 Campaigns
3x or > Ad Spend
5x or > Ad Spend
49%
70%
Revenue Model
Revenue Model
($ in millions)
Q1
2008A
2009A
2010A
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2011A 03/31/2012A 06/30/2012A 09/30/2012A 12/31/2012A 2012A 03/31/2013E 06/30/2013E 09/30/2013E 12/31/2013E
2013E
2014E
2015E
2016E
2017E
2018E
Payments & Fees
N/A
13.0
106.0
557.0
186.0
192.0
176.0
256.0
810.0
203.0
233.5
274.1
304.5
1015.0
1253.9
1523.2
1804.2
2064.8
2240.3
% Growth
N/A
N/A
715.4%
425.5%
(1.1%)
3.2%
(8.3%)
45.5%
45.4%
(20.7%)
15.0%
17.4%
11.1%
25.3%
23.5%
21.5%
18.4%
14.4%
8.5%
% of Total Revenue
N/A
1.7%
5.4%
15.0%
17.6%
16.2%
13.9%
11.4%
15.9%
15.5%
15.5%
15.5%
15.5%
15.5%
15.1%
14.6%
14.2%
13.8%
13.4%
Advertising
N/A
764.0
1868.0
3154.0
872.0
992.0
1086.0
1329.0
4279.0
1107.0
1273.0
1494.4
1660.5
5535.0
7064.6
8874.9
10881.5
12904.4
14525.2
% Growth
N/A
N/A
144.5%
68.8%
(7.5%)
13.8%
9.5%
22.4%
35.7%
(16.7%)
15.0%
17.4%
11.1%
29.4%
27.6%
25.6%
22.6%
18.6%
12.6%
% of Total Revenue
N/A
98.3%
94.6%
85.0%
82.4%
83.8%
86.1%
88.6%
84.1%
84.5%
84.5%
84.5%
84.5%
84.5%
84.9%
85.4%
85.8%
86.2%
86.6%
Total Revenue
272
777.0
1974.0
3711.0
1058.0
1184.0
1262.0
1585.0
5089.0
1310
1506.5
1768.5
1965
6550.0
8318.5
10398.1
12685.7
14969.1
16765.4
% Growth
77.78%
185.7%
154.1%
88.0%
(6.45%)
11.91%
6.59%
25.6%
37.1%
(17.4%)
15.0%
17.4%
11.1%
28.7%
27.0%
25.0%
22.0%
18.0%
12.0%
250.0%
Year-Over-Year Growth GOOG vs. FB
200.0%
150.0%
100.0%
50.0%
0.0%
Year 1
Year 2
Year 3
Year 4
Year 5
Google
Year 6
FB
Year 7
Year 8
Year 9
Expenses - SBC
Discounted Cash Flow Analysis
($ in millions)
2013E
2014E
2015E
2017E
2018E
Net Income
$1,801.2
$2,060.8
$2,577.4
$3,386.5
$3,676.7
$4,431.5
Net Margin
27.5%
24.8%
24.8%
26.7%
24.6%
26.4%
Add Back: Depreciation and Amortization
554.8
1,202.9
1,529.0
1,869.4
2,216.6
2,542.9
Add Back: Interest Expense*(1-Tax Rate)
37.4
48.4
62.5
78.8
97.5
114.3
Add Back: SBC
1,000.9
906.6
916.3
642.3
540.9
414.4
Operating Cash Flow
$3,394.3
$4,218.6
$5,085.2
$5,977.0
$6,531.7
$7,503.2
Unlevered Free Cash Flow
$2,600.1
$2,381.9
$2,911.2
$3,427.3
$3,334.8
$4,556.3
EBITDA
$2,677.6
$3,777.9
$4,947.9
$6,552.4
$8,002.5
$9,204.9
Avg Post-IPO SBC Decline GOOG, RHT, CRM
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
35.0%
Beta
30.0%
Market Risk Premium
25.0%
2016E
% Equity
29.5%
20.0%
15.0%
16.1%
10.0%
5.0%
8.9%
6.9%
0.0%
Year 1
Year 2
Year 3
Year 4
32.00% Terminal Growth Rate
2.50% Terminal Value
1.40 PV of Terminal Value
5.46% Sum of PV Free Cash Flows
Conside
3.00%
97,142
41,518
24,467
97.63% Firm Value
65,985
% Debt
2.37% Total Debt
1,562
Cost of Debt
1.46% Cash & Cash Equivalents
9,626
CAPM
9.05% Market Capitalization
74,049
WACC
8.87% Fully Diluted Shares
2,166
Implied Price
34.19
4.2%
Current Price
28.10
Year 5
Undervalued
21.66%
Cap Ex
Q4 2012 Earnings Call Transcript, CFO
David Ebersman:
“…2013 will be a year of significant
investments… we plan to continue to hire
aggressively to accelerate product development
and deliver new products for users and
advertisers.
“…we expect CapEx spend in 2013 will be in
the neighborhood of $1.8 billion as we continue
to invest in servers, new data centers and
network infrastructure…”
› Negative for Short-term Profits
› Positive for Future Growth
Tax Rate
Discounted Free Cash Flow Assumptions
Discounted Cash Flow Analysis
($ in millions)
Tax Rate
2013E
2014E
2015E
2016E
2017E
2018E
Earnings Before Interest & Taxes
$2,122.8
$2,575.0
$3,418.9
$4,683.0
$5,785.8
$6,661.9
Tax Rate
43.0%
42.0%
40.0%
33.0%
28.0%
24.0%
Net Income
$1,801.2
$2,060.8
$2,577.4
$3,542.6
$4,072.6
$4,952.9
Unlevered Free Cash Flow
$1,599.2
$1,475.4
$1,994.9
$2,947.6
$3,200.4
$4,676.7
EBITDA
$2,677.6
$3,777.9
$4,947.9
$6,552.4
$8,002.5
$9,204.9
Earnings Before Interest & Taxes
$2,122.8
$2,575.0
$3,418.9
$4,683.0
$5,785.8
$6,661.9
Tax Rate
43.0%
42.0%
40.0%
38.0%
35.0%
32.0%
Net Income
$1,801.2
$2,060.8
$2,577.4
$3,386.5
$3,676.7
$4,431.5
Unlevered Free Cash Flow
$1,599.2
$1,475.4
$1,994.9
$2,785.1
$2,793.9
$4,141.9
EBITDA
$2,677.6
$3,777.9
$4,947.9
$6,552.4
$8,002.5
$9,204.9
Risk Free Rate
Beta
Market Risk Premium
% Equity
24.00% Terminal Growth Rate
2.50% Terminal Value
1.70 PV of Terminal Value
5.46% Sum of PV Free Cash Flows
Conside
3.00%
99,708
42,615
22,039
97.63% Firm Value
64,654
% Debt
2.37% Total Debt
1,562
Cost of Debt
1.46% Cash & Cash Equivalents
CAPM
9.05% Market Capitalization
72,718
WACC
8.87% Fully Diluted Shares
2,166
Implied Price
33.57
9,626
Current Price
28.10
Undervalued
19.47%
Beta, CAPM, WACC
FB CAPM Evolution
FB Beta Maturation
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
1.7
15.0%
14.4%
13.7%
1.6
14.0%
1.5
13.0%
12.3%
13.0%
1.4
1.3
11.6%
12.0%
1.2
10.9%
11.0%
10.0%
9.0%
8.0%
2013
2014
2015
2016
2017
2013
2018
FB WACC Evolution
15.0%
14.1%
13.4%
14.0%
12.7%
13.0%
12.0%
11.4%
12.0%
10.7%
11.0%
10.0%
9.0%
8.0%
2013
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Capital Structure
Comparables Analysis
Implied Price
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
Beta
32.00% Terminal Growth Rate
2.50% Terminal Value
1.7, 1.6, 1.5, 1.4, 1.3, 1.2 PV of Terminal Value
Considerations
Final Implied Price
3.00%
Method
88,306
37,742
Implied Price
20,173
DCF
$30.46
97.63% Firm Value
57,915
% Debt
2.37% Total Debt
1,562
Forward Comp Model 1
$24.91
Cost of Debt
1.46% Cash & Cash Equivalents
9,626
Forward Comp Industry
$23.77
CAPM
9.05% Market Capitalization
65,979
WACC
8.87% Fully Diluted Shares
2,166
Price Target
$28.62
Implied Price
30.46
Current Price
$28.10
Current Price
28.10
Undervalued
8.40%
Undervalued
1.86%
Market Risk Premium
% Equity
5.46% Sum of PV Free Cash Flows
Weight
70%
15%
15%
Sensitivity Analysis
Equal Weighted Multiples (excluding EV/EBIT and P/E)
Multiple
Implied Price
Weight
EV/Revenue
$21.62
16.67%
EV/Gross Profit
$21.56
16.67%
EV/EBIT
$122.22
0.00%
EV/EBITDA
$46.54
16.67%
EV/(EBITDA-Capex)
$56.57
16.67%
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Price/Operating Cash Flow
$29.10
16.67%
Price/Operating Cash Flow
$23.76
16.67%
Price/FCF
$22.48
16.67%
Price/FCF
$17.95
16.67%
P/E
$98.50
0.00%
P/E
$73.06
0.00%
Price Target
$32.98
Price Target
Equal Weighted Companies
Implied Price
Weight
$17.51
16.67%
$18.61
16.67%
$88.54
0.00%
$38.52
16.67%
$51.06
16.67%
$27.90
Current Price
$28.10
Current Price
$28.10
Undervalued
17.36%
Overvalued
(.70%)
Questions?
Conclusion – Buy
› Brand, Market Penetration, Smartphone Growth
› Somewhat Speculative—Position Size Accordingly
› Gives us Exposure to Social Media Space
› Buy Around $25-26