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Carlos Kirjner, Ph.D. (Senior Analyst) • carlos.kirjner@bernstein.com • +1-212-823-3237
Ram Parameswaran • ram.parameswaran@bernstein.com • +1-212-969-2427
Amelia Chan • amelia.chan@bernstein.com • +1-212-969-2165
See Disclosure Appendix of this report for important disclosures and analyst certifications.
When the final prospectus is available, you may access it here.
U.S. Internet: Should You Friend Facebook? What It Is, What It
Could Be, and a Valuation Framework
Ticker Rating CUR
10 Apr 2012
Closing
Price
Target
Price
TTM
Rel.
Perf.
EPS P/E
2011A 2012E 2013E 2011A 2012E 2013E Yield
GOOG O USD 626.86 727.00 6.4% 29.70 38.33 45.70 21.1 16.4 13.7 NA
YHOO M USD 14.99 17.00 -13.7% 0.82 0.78 0.81 18.3 19.2 18.5 NA
SPX 1358.59 96.14 104.35 117.66 14.1 13.0 11.5 2.0%
O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated
Highlights
Over the next 12 to 24 months, the main question for potential Facebook investors will be this: will the
company invent, or has it already invented, an "online social advertising" model that will attract large
amounts of advertising spend? In today's report, we lay out our views on the nature, size and value of
Facebook's business, characterize and size the (still unproven at scale) potential for social advertising, and
offer a valuation framework for the company. Our objective is not to determine a specific value for
Facebook, but to put in place two scenarios and their respective valuations that investors can use as
yardsticks. We are planning to publish more detailed reports dealing with the business and its valuation in
the next several weeks.
∑ Facebook's ambition is to make the whole Web social. We believe Facebook has two major long-term
objectives: make facebook.com the site where a very large number of global consumers keep and nurture
their (digital) relationships with other people, with brands and with businesses, the place where they find
and consume information and entertainment, and where they transact. In other words, Facebook aims to
create a social alternative to the open Web. In addition, we think Facebook also aspires to make the open
Web social, by making its platform, built on top of its nearly 1 billion customers' social graph, available
to third party applications. If it succeeds in its two objectives, it will be as disruptive, and potentially
more disruptive, than Google. However, this vision is still (at best) a few years out and the road ahead is
long and tortuous. For Facebook to have a chance to succeed in meeting the ambitious objectives we
speculate it has, it first needs to establish that it can monetize its assets effectively, and "social
advertising" is (at least today) the main tool for the company to build a distinctive and advantaged
business.
∑ We developed a bear and a bull scenario for Facebook, based on the potential evolution of social
advertising, which correspond to enterprise values of $60 billion to $100 billion. In addition, the
market may attribute material option value to Facebook's business and key asset, its social graph,
to reflect potential future opportunities. We think today these strategic options could be valued at
$50 billion (Exhibit 2).
- Bearish Scenario: social advertising is just like display. We believe that at a minimum Facebook is
poised to be the largest and most valuable display advertising property on the World Wide Web. It has
multiple competitive advantages that over time will allow it to capture a large share of users,
impressions and revenues, even if social advertising fails to fulfill its promise. In this scenario, we
would expect Facebook's 2017 revenues to reach about $14 billion, with EBITDA of $7.3 billion, and
estimate its enterprise value at $60 billion.
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- Bullish Scenario: the social advertising revolution. If social advertising proves to be effective in
generating demand or driving conversion for a large number of advertisers and advertising dollars and
drives a shift in (online) advertising similar in nature to the impact of Google and search, then we
expect Facebook to reach nearly $23 billion in revenue by 2017, EBITDA of $12 billion,
corresponding to an enterprise value of about $100 billion.
- Option value: the value of 1 billion users, their online time, and their digital identities. If Facebook
succeeds in growing facebook.com to be a social alternative to the Web and/or in making a large
portion of the Web social, turning its users' social graph into "critical infrastructure" for the whole
Internet, then the company's value would be immense. We do not think it is possible to enumerate the
yet-to-be-defined opportunities available to the company. Instead, we believe the best approach is to
use comparables to ascribe a value to the asset that would generate them, the information in the social
graph of Facebook's 1 billion users. Based on the value of other information assets, we think
Facebook's "option value" premium today could reach $50 billion. As the company evolves, and if
such opportunities become more tangible, this option value may increase materially.
∑ The potentially large but still largely unproven opportunity for Facebook lies in becoming the
social platform of the whole Web. If social advertising proves highly effective to advertisers, the
monetization opportunity available to Facebook would go well beyond facebook.com to include the
whole Internet. Facebook could be in position to provide social information on or serve targeted social
ads to 1 billion Internet users across the whole Internet. Facebook's current strategy clearly reflects its
ambition to create and capture this broader opportunity: it has built a platform based on the Social Graph,
which it has made accessible to third parties through the OpenGraph API and through social plug-ins.
Facebook is not only a very large Internet publisher, it is in fact an attempt to make the whole Web
social, turning Facebook's social graph into "critical infrastructure" for the whole Internet, just like
Google's search today.
∑ There are four major risks we believe Facebook investors must consider: the company's ability to
balance monetization and customer experience, competition, particularly from Google, the regulatory
risk, particularly privacy regulation in the EU, and governance. While they all are in theory manageable
and the early signs are positive, these risks do increase the level of uncertainty associated with the long-
term trajectory of the business and should have a non-trivial impact on Facebook's multiple over time.
Investment Conclusion
We believe the cash flows from online advertising alone justify an enterprise value between $60 billion to
$100 billion for Facebook, depending on the degree to which social advertising works, that is, the extent to
which it generates ROIs that are better than current alternatives to a large number of advertisers. In
addition, we expect the company to be valued at a premium to the value of these cash flows, given the
strategic options created by its unique assets, particularly the social graph of about 1 billion users. We
currently believe the premium could reach $50 billion, but it will in the end depend on the market's
confidence on the company's ability to find and capture new opportunities to monetize the social graph.
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Details
∑ We think Facebook's strategy has two main planks (see Exhibit 1). First, it seeks to grow the importance
and relevance of facebook.com, and make it the site where a very large number of global consumers keep
and nurture their (digital) relationships, with other people, with brands and with businesses, the place
where they find and consume information and entertainment, and where they transact (or at least
originate many of their transaction). In other words, Facebook aims to create a social alternative to the
open Web.
∑ In addition, we think Facebook also aspires to make the open Web social, by making its platform, built
on top of its 1 billion customers' social graph, available to third party applications. If it succeeds in its
two objectives, it will be as disruptive, and potentially more disruptive, than Google. However, this
vision is still (at best) a few years out and the road ahead is long and tortuous. For Facebook to have a
chance to succeed in meeting the ambitious objectives we speculate it has, it first needs to establish that it
can monetize its assets effectively, and "social advertising" is (at least today) the main tool for the
company to build a distinctive and advantaged business.
Exhibit 1
Facebook's Strategy: Make the Whole Web Social
Source: Bernstein analysis
∑ Our bear and bull scenarios for the evolution of social advertising on the Web and the associated revenue
trajectories for Facebook yield enterprise values for Facebook of $60 billion and $100 billion. In
addition, the market may attribute material option value to Facebook's business and key assets, its
• Social relationships
• B2C relationships
• Entertainment
• E-commerce
.
.
.
.
.
.
.
Social Graph
Social
Plugins
OpenGraph
API
Authentication
(FB Connect)
Open Web
:: Facebook.com ::
“Socialized”
Open Web
1) Expand Facebook.com 2) Make all the web social Facebook Objectives:
:: Facebook platform ::
2
1
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audience and the social graph, to reflect potential future opportunities they may enable. We think this
option value could range between zero and $50 billion (Exhibit 2).
Exhibit 2
Facebook Enterprise Value – Bear and Bull Scenarios and Option Value ($ billions)
Source: Bernstein analysis and estimates
∑ Which scenario plays out depends largely on Facebook's ability to monetize its key assets. It has two
assets with very high potential value: its large and highly engaged user base of nearly 1 billion
consumers and the demographic, behavioral and social graph data it has collected about its users. It is the
latter, the social graph, that makes Facebook truly distinctive from other large Web properties such as
Yahoo! or YouTube, for example. The social graph is a computer representation of individuals and
objects (photos, places, articles, songs, brands, Web pages, etc), which make up the nodes of the graph,
and actions (friend, like, read, listen, check-in, play, etc), which make up the edges of the graph
connecting the nodes (Exhibit 3).
∑ In our view, the extent to which Facebook will be able to monetize the social graph is the key investment
controversy related to the company. Facebook's social graph will have massive value if social
advertising, that is, advertising that uses social graph elements either for targeting or on the ad itself
1
,
proves to be highly effective "at scale," that is for a large number of consumers and advertisers,
corresponding to a large amount of advertising dollars. In turn, this will give Facebook the scale and
1
One example would be a Verizon FiOS ad that says "Craig Moffett likes Verizon," to one of Craig's Facebook
friends. A full list and description of the ad formats offered by Facebook can be found at
http://ads.ak.facebook.com/ads/FacebookAds/Premium_Guide_2.29.12.pdf;
https://www.facebook.com/business/sponsoredstories/; https://www.facebook.com/business/ads/
60
100 100
Bear Scenario Bull Scenario Bull Scenario with option value
0-50
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resources to extend its business to other opportunities it may be well positioned to capture. In other
words, the bullish Facebook thesis is primarily a thesis on the effectiveness of social advertising.
∑ The early, anecdotal evidence on the effectiveness of social advertising is compelling but far from
dispositive. The fact that specific campaigns, advertisers, or verticals are seeing positive results in a
handful of occasions, while encouraging, does not mean that this success is "scalable" to billions of
dollars of advertising spend.
Exhibit 3
An Illustration of the Social Graph
Source: Bernstein analysis
∑ In view of this uncertainty, we believe investors considering a stake in the company should think of two
scenarios for the evolution of social advertising and Facebook's value: a world where social advertising
does not perform fundamentally better than display-as-we-know-it, and a scenario where Facebook and
social cause a fundamental shift in how advertising dollars are spent, similar in nature (if not in
magnitude) to the effect that Google and search had on the performance and direct response advertising
spend pool over the last 10 years or so.
∑ In addition to the two scenarios depending largely on the evolution of social advertising, the market is
likely to attribute a premium to Facebook based on other potential options it may have to monetize the
rich data set and the engagement of its nearly 1 billion users. Over time, as consumers use Facebook with
a growing set of applications, for varying purposes, and with increasing frequency, their Facebook
profiles will be akin to their digital identities: (curated) repositories of data, interactions, preferences, and
history that uniquely reflect individual users. Access to this large and rich dataset may lead to a slew of
new business opportunities, which Facebook may seek to capture directly or through applications
developed through third-parties. Some of the opportunity areas could include payments, credit, banking,
games and entertainment, content distribution, e-commerce and consumer electronics. We believe the
Play
Friend
Macy’s
CityVille WSJ
Starbucks
Food
Spotting
Check-in
Like
Read
Share
Spotify
Share
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best way to value these yet-to-be-defined and impossible to enumerate opportunities is to ascribe a value
to the asset that would generate them, the information in the social graph of 1 billion Facebook users.
Based on the value of other information assets, we think Facebook's "option value" premium could reach
$50 billion today.
∑ As Facebook evolves and some or all of these opportunities become more (or less) plausible or concrete,
investors will likely attribute a higher (or lower) "option value" premium to the business.
∑ We discuss the details of these two scenarios and of the option value below, hoping they will help
investors exercise their judgment on their relative likelihood, and hence determine a specific enterprise
value for Facebook. We will be publishing our own view in the upcoming weeks.
The Bearish Scenario: social advertising is just like display and Facebook is worth $60 billion
∑ Even if the promise of social advertising fails to materialize, Facebook will still be a major force in
online advertising. We estimate that its nearly 1 billion monthly average users (MAUs) correspond to
about 60% of the global Internet users outside China (Exhibit 4), where Facebook is blocked, and
roughly 80% of US Internet users.
Exhibit 4
Facebook Monthly Average Users (MAUs) as a % of Global Internet Users* (millions)
* Include fixed and mobile Internet users.
Source: Company reports, Bernstein analysis
∑ Facebook is among the leading sites globally and in the US across usual engagement metrics such as
pages viewed, and time spent online (Exhibit 5 and Exhibit 6)
2
. Facebook corresponds today to 14% of
the total time spent online in the US and 15% of pages viewed. With this scale, engagement and the
information it has about its users, it is highly likely that Facebook will be the leading display advertising
site in the world, even if the promise of social advertising does not materialize.
2
These Exhibits are based on ComScore data that only capture fixed Internet usage.
2,100
550
1,550
920
Global Internet users China Internet users Global Internet users ex-China Estimated Facebook MAUs (April
2012)
59%
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Exhibit 5
Engagement Metrics for the U.S., Feb. 2012, as a
Percentage of Total Fixed Internet Users
Exhibit 6
Engagement Metrics Worldwide, Feb. 2012, as a
Percentage of Total Fixed Internet Users
Source: comScore, Bernstein analysis Source: comScore, Bernstein analysis
Exhibit 7
2011 Global Display Advertising Market ($ billions)
Source: Magna Global, Bernstein analysis, iAB
80%
14% 15%
86%
5%
5%
87%
8%
5%
Unique Visitors
(000)
Minutes (MM) Pages Viewed (MM)
Facebook Google Yahoo!
55%
14% 15%
74%
4%
6%
47%
3%
Unique Visitors (000) Minutes (MM) Pages Viewed (MM)
Facebook Google Yahoo!
80
35
9
37
5
32
3
Total online
advertising
Search (excl.
contextual
display)
E-mail, lead
generation and
classifieds
Total display Video Online display-
only market
Facebook
91.4%
8.6%
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∑ We estimate that in 2011 the global display advertising market
3
was approximately $37 billion (Exhibit
7), and that Facebook captured about 9% of the market, with $3 billion dollars of advertising revenue
(Exhibit 8).
∑ In the display market, Facebook has multiple competitive advantages, in addition to its scale and the high
engagement of its users, which we believe have not yet been fully played out:
- Its penetration among certain highly sought demographic groups (e.g., young adults between 15 and 44
years old) makes Facebook even more attractive to advertisers (Exhibit 9).
- Facebook's ability to target relatively large populations across multiple demographic and interest
criteria makes it one of few Web sites that fulfill the needs of advertisers seeking scale, "targetability"
and brand safety (which is ensured in Facebook's case since the advertisers know where the ads will
appear). Facebook standard ad-buying interface
4
offers 9 different targeting variables – location, age,
gender, general interest, demographic interest, relationship, languages, education, workplace (see
Exhibit 10 for a graphical depiction of the different targeting variables offered by the standard
Facebook ad units interface
5
) - and the scale of the property allows advertisers to reach large numbers
of people even in relatively narrow demographic, behavioral and interest groups.
Exhibit 8
Breakdown of Facebook's Revenue Sources ($ millions)
Source: Company reports, Bernstein analysis
- Facebook offers advertisers the ability to target users according to several broad categories (Exhibit
11) or according to "precise interests targeting". As an illustration of the latter, Facebook reaches an
3
There is no widely accepted definition of what formats are included in the display advertising category. Some
sources will include video, while other won't. Some will include mobile, while others won't. None will include
contextual text ads served through, e.g., AdSense for Content, which we believe are more like display ads than like
search ads. Exhibit 6 tries to lay out clearly what we include in the display spend addressable market.
4
Which can be accessed through www.facebook.com/ads/create
5
We believe advertisers who purchase through the API have much greater targeting flexibility
3,711
3,154
557
100
457
Facebook Total Revenues Advertising Revenues Payment Revenues Payment from others Payments from Zynga
82%
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estimated 36,780 males living in Canada or the United States, between the ages of 18 and 35, and who
like "skydiving" or "I love skydiving", and who are single or in a relationship (Exhibit 12).
Exhibit 9
Facebook Penetration by Age and Gender, % of Total US Population*
*Note that penetrations in this exhibit are of total US population, and not just online population. In addition, we used comScore usage statistics that capture only fixed
Internet users
Source: comScore, U.S Census, Bernstein Analysis
- As another example, Facebook can target 98,000 engaged, 18 years-and-older females in the New
York City area (Exhibit 13); it can target 6,119,500 18-35 years-old, unmarried men who enjoy
outdoor fitness activities, and who live in the US or Canada (Exhibit 14).
- Finally, and importantly, we believe Facebook can deliver display impressions to an advertisers' target
demographic at scale more accurately than most other properties on the Web, as all Facebook users are
logged on, and due to the site's terms of use and user authentication procedures
6
. Facebook refers to its
users' "authentic identities."
- Across the Web, on target delivery of advertising to specific demographics varies widely, and is often
quite low. For example, Nielsen applied its latest online audience measurement tool, OCR (Online
Campaign Ratings), to a recent online campaign by a manufacturer of women's personal care products,
targeting 25 to 54 year old females (F25-54), across multiple publishers with a total of 30 million
impressions. The results show extremely wide variation of on-target delivery of ads across the sites
(Exhibit 15). The least accurate site delivered only 19% of the impressions to the target demographic,
while the most accurate delivered up to 40%. On average, only 25% of impressions were delivered to
the target demographic (F25-54), and a stunning 47% of impressions were actually delivered to male
users. Another large campaign across 14 Web properties targeted males between the ages of 18-24 for
6 months, delivering over 170 million impressions. Data from Nielsen's OCR showed similar
discrepancies in on-target delivery and in fact suggests that such discrepancies are uncorrelated with
the size or the number of impressions delivered by the sites (Exhibit 16).
6
There are certainly fake profiles on Facebook. Nevertheless, the fact that users are always logged on and
authenticated through email or mobile phone, dramatically improves targetability of display advertising.
77%
86%
77%
58%
52%
82%
80%
86%
66%
53%
15-24 25-34 35-44 45-54 All Ages
Male Female
Average Facebook
penetration across
all ages ~ 52%
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- While in its S-1 Facebook claims it can reach on-target delivery in the range of 90% to 95%, we are
skeptical that these are typical for all demographics and interest groups (we believe for that certain
demographic groups such as gender and age the quality of the targeting is higher than for other data).
- However, we think Facebook has in general, much better on-target delivery than most sites on the
Web, an increasingly important competitive advantage as measurement of Web campaigns improves.
We believe one of Facebook's underappreciated achievements was to "solve" the Internet user-identity
problem. The fact that users are logged on and authenticated to some degree (far from perfect but
much better than nothing), gives Facebook the potential to deliver targeted advertising with much
better performance, and become the main provider of federated identity across the Internet through
Facebook Connect. By offering federated login to other sites, Facebook acquires those sites to its
network, enables them to become "social," and learns more about its users Web usage habits.
Exhibit 10
Facebook Standard Targeting Advertising Interface
Source: Bernstein analysis, www.facebook.com/ads/create
Location
Country:
Demographics
Age:
Sex:
Interests
Broad Category:
Advanced Demographics
Interested in:
Relationship:
Language:
Education & Work
Education:
Workplaces:
Everywhere
By State/Province
By City
By Zip Code
Include cities within ___ miles.
---
Require exact age match
All
Men
Women
Activities
Business/Technology
Ethnic
Events
Family Status
Interests
Mobile
Movie/Film
Music
Retail/Shopping
Cooking
Dancing
DIY/Crafts
Event Planning
Food & Dining
Gaming (Console)
Gaming (Social/Online)
Gardening
Literature/Reading
Outdoor Fitness Activities
Photo Uploading
Photography
Switch to Precise Interest Targeting
Precise Interests:
Suggested Likes and Interests
XXXX (Facebook-suggested like and interest)
All
Men
Women
All
Single
In a relationship
Engaged
Married
Enter language
All
College Grad
In College
In High School
Enter a company, organization, or other workplace
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Exhibit 11
Broad Interest Categories and Sub-categories
Source: Bernstein analysis, www.facebook.com/ads/create
Broad Category
Targeting of Interests
Sub-categories
Activities Cooking, Dancing, DIY/Crafts, Event Planning, Food & Dining, Gaming
(Console), Gaming (Social/Online), Gardening, Literature/Reading, Outdoor
Fitness Activities, Photo Uploading, Photography, Traveling
Business/Technology Computer Programming, Personal Finance, Real Estate, Science/Technology,
Small Business Owners
Ethnic Hispanic (US)
Events Has birthday in <1 week, Recently Moved
Family Status Away from Family, Away from Hometown, Baby Boomers, Engaged (<1
year), Engaged (<6 months), Expecting Parents, Newlywed (<1 year),
Newlywed (<6 months), Parents (All), Parents (child: 0-3 yrs), Parents
(child: (4-12 yrs), Parents (child: 13-15 yrs), Parents (child: 16-19 yrs)
Interests Auto Intender (US), Autos, Beer/Wine/Spirits, Charity/Causes,
Education/Teaching, Entertainment (TV), Environment, Health & Well-
being, Home & Garden, News, Pets (All), Pets (Cats), Pets (Dogs), Politics (US
Active), Politics (US Conservative), Politics (US Liberal), Pop Culture
Mobile Mobile (All), Active Feature Phone Users, Android, iPad, iPhone, Others,
RIM/Blackberry, Windows Phone
Movie/Film Movie/Film (All), Action/Adventure, Animated, Bollywood, Classic, Comedy,
Drama, Family, Horror, Independent, Musical, Romance, Science
Fiction/Fantasy, Sports, Suspense/Thriller
Music Music (All), Alternative, Children's Music, Christian & Gospel, Classic Rock,
Classical, Comedy, Country, Dance/Electronic, Hip Hop/Rap, Jazz/Blues,
Metal, Pop, R&B/Soul, Reggae, Rock
Retail/Shopping Beauty Products, Consumer Electronics, Fashion, Luxury Goods
Sports Sports (All), Baseball, Basketball, Cricket, Extreme Sports, Fantasy Sports,
Football (American), Golf, Ice Hockey, Motor Sports/NASCAR,
Soccer/European Football, Tennis
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Exhibit 12
Targeting by Facebook – Example 1
Exhibit 13
Targeting by Facebook – Example 2
Source: Bernstein analysis, www.facebook.com/ads/create Source: Bernstein analysis, www.facebook.com/ads/create
Exhibit 14
Targeting by Facebook – Example 3
Source: Bernstein analysis, www.facebook.com/ads/create
Parameters Choice
Location:
Country: United States, Canada
City: -
Demographics:
Age: 18 - 35
Sex: Men
Interests:
Broad Categories: -
Precise Interests: Skydiving, I love Skydiving
Advanced Demographics:
Interested in: All
Relationship: Single, In a relationship
Languages: -
Education: All
Workplaces: -
Estimated Reach 36,780
Parameters Choice
Location:
Country: United States
City: New York City area
Demographics:
Age: 18 - Any
Sex: Women
Interests:
Broad Categories: -
Precise Interests -
Advanced Demographics:
Interested in: All
Relationship: Engaged
Languages: -
Education: All
Workplaces: -
Estimated Reach 98,080
Parameters Choice
Location:
Country: United States, Canada
City: -
Demographics:
Age: 18 - 35
Sex: Men
Interests:
Broad Categories: Activities > Outdoor Fitness
Precise Interests: -
Advanced Demographics:
Interested in: All
Relationship: Single, In a relationship
Languages: -
Education: All
Workplaces: -
Estimated Reach 6,119,500
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Exhibit 15
Discrepancies in the Targeting of Display Ad Impressions – Actual Campaign Data
Source: The Nielsen Company, "Online Campaign ratings"
Exhibit 16
Discrepancies in the Targeting of Display Ad Impressions
Source: The Nielsen Company, "Online Campaign Ratings"
40%
34%
29%
27%
24%
19%
Publisher A (3% of
impressions)
Publisher B (33% of
impressions)
Publisher C (7% of
impressions)
Publisher D (2% of
impressions)
Publisher E (2% of
impressions)
Publisher F (52% of
impressions)
Weighted Average on-target delivery percentage = 25%
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∑ In view of its scale, engagement and its yet to be fully exploited competitive advantages, we believe that
even if social advertising does not take off, Facebook would still accelerate the growth of the display
advertising market and capture a growing share of total spend. Indeed, in this scenario we would expect
that by 2017, the global display advertising market (defined to include the ad formats shown in Exhibit
7) will reach $69 billion and Facebook will likely capture 18% share of global spend, or $12.6 billion
(Exhibit 17).
Exhibit 17
Display Ad Market and Facebook Share ($ billions)
Source: Bernstein analysis, MagnaGlobal, IAB, company reports
∑ In addition to display advertising revenues, we expect that revenues from the sale of virtual goods by
social game companies such as Zynga will continue growing, but at a decreasing rate, and estimate they
would reach $1.1 billion by 2017.
- Zynga accounts for nearly 82% of Facebook's non-advertising revenues (Exhibit 8), and its games
attract several times more users than the next app publishers' (Exhibit 18), many of which do not
monetize as well as Zynga. We believe Zynga's growth on Facebook will slow down for two reasons:
first, we think the acquisition cost of an incremental user to Zynga, that is, a user who is not a current
or recent Zynga gamer, has increased materially since Facebook decreased the "virality" of gaming on
the platform in mid-2010.
- For exactly the same reason, we do not believe investors should assume the emergence of new, at scale
social game publishers on the Facebook platform beyond Zynga. We think the ability of new social
game publishers to reach scale economically within Facebook was very much curtailed as Facebook
drastically reduced the "virality" of games to maintain the quality of user experience, increasing the
(new) customer acquisition costs for game publishers.
- Indeed, Zynga's MAU numbers (Exhibit 19) show a drastic slowing down over the last 5 quarters
compared to the 3Q10 growth rate. Second, we believe that, over time, Zynga will take steps to shift
some of its user base away from Facebook. We suspect this will occur slowly and as new users are
acquired and new games released, but will likely further slow down Zynga's growth within Facebook.
33.4
37.6
41.8
45.8
49.6
53.2
56.4
3.2
4.5
6.0
7.7
9.4
11.0
12.6
2011 2012E 2013E 2014E 2015E 2016E 2017E
Google, Yahoo & Others Facebook
Facebook share = 18%
Facebook share = 9%
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Carlos Kirjner, Ph.D. (Senior Analyst) • carlos.kirjner@bernstein.com • +1-212-823-3237
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- We estimate overall payment revenues to reach $1.1 billion by 2017, with Zynga still accounting for
82% of the total (Exhibit 20).
Exhibit 18
Monthly Average Users for Different Applications Publishers on Facebook.com, updated April 7, 2012
Source: www.appdata.com
Exhibit 19
Zynga MAUs and YoY Growth Rate
Source: Bernstein analysis and estimates, company reports
Developer Monthly Average Users (MAU)
Zynga 285,571,592
Mensing 67,100,000
Woobox 63,900,000
Yahoo! 51,098,539
Microsoft 48,600,000
Electronic Arts 47,423,835
Wooga 45,760,000
king.com 35,680,000
Mycalendar 31,700,000
Telaxo 23,549,990
Scribd 21,100,000
Rovio 20,800,000
Playdom 20,060,301
Tripadvisor 18,500,000
Spotify 17,700,000
203
195
236
228 227
240
105%
(6%)
0%
(3%)
12%
23%
-20%
0%
20%
40%
60%
80%
100%
120%
0
50
100
150
200
250
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Average MAUs YoY Growth in Average MAUs
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Exhibit 20
Facebook Payment revenues and contribution from Zynga ($ millions)
Source: Bernstein analysis and estimates, company reports
∑ As a consequence, we estimate that in this bearish scenario Facebook would generate total 2017 revenues
of $13.7 billion, EBITDA of $7.3 billion and operating income of $6.5 billion (Exhibit 21). Using a
simplified long-term DCF (Exhibit 22), we arrive at a valuation of $60 billion for our bearish scenario.
This corresponds to 13 times 2013 estimated EBITDA of $3.9 billion.
∑ Of course, the EV we calculate is dependent on our choice of WACC. As an illustration, if we set the
WACC at 11%, the EV for the Bear case would be $52 billion, and $58 billion for a WACC of 10%.
Exhibit 21
Facebook.com income statement : Bear case
Source: Bernstein analysis
* Excluding an estimated $968 million in compensation expense associated with "pre-2011" RSUs
457
520
558
620
754
820
872
100
114
123
136
166
180
192
557
1,064
2011 2012E 2013E 2014E 2015E 2016E 2017E
Zynga Payments to Facebook Facebook Payments Revenues (other sources)
Zynga contribution to Facebook payment revenue = 82%
Income Statement 2011 2012E 2013E 2014E 2015E 2016E 2017E
Revenue 3,711 5,125 6,705 8,426 10,278 12,027 13,693
Advertising revenue 3,154 4,491 6,025 7,670 9,358 11,027 12,629
Payments and other fees revenue 557 634 680 756 920 1,000 1,064
Cost of revenue 860 1,160 1,484 1,827 2,188 2,521 2,833
Gross Profits 2,851 3,965 5,221 6,599 8,090 9,506 10,860
Total Operating Expenses 1,095 1,533 2,032 2,583 3,184 3,759 4,312
Marketing and sales 427 578 742 916 1,099 1,268 1,426
Research and development 388 556 754 977 1,224 1,465 1,700
General and administrative 280 398 536 691 861 1,026 1,186
Income from operations 1,756 1,464 3,189 4,015 4,906 5,747 6,548
Non-operating items/one offs - 968 - - - - -
EBIT 1,756 1,464 3,189 4,015 4,906 5,747 6,548
EBITDA* 2,079 3,182 3,898 4,773 5,720 6,594 7,384
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Exhibit 22
Facebook.com : DCF Valuation : Bear case
Source: Bernstein analysis
The Bullish Scenario: social advertising takes-off, the social Web emerges, Facebook's social graph becomes
a ubiquitous, critical utility, and Facebook is worth about $100 billion before a premium for strategic options
∑ While becoming the largest display advertising property on the Web, with an estimated enterprise value
in the vicinity of $50 billion is not something to be sneezed at, the distinctive near and medium term
revenue generating potential from Facebook stems from the value of the social graph and the (still
unproven at scale) potential it has to drive a fundamentally better (i.e., higher ROI to advertisers) form of
online advertising based on social.
∑ As we discussed above (Exhibit 1), we think Facebook aspires to become a ubiquitous platform for
social applications and advertising across the whole Web, fixed and mobile.
∑ The foundation of the Facebook Platform is the social graph (Exhibit 3). The Platform gives applications
access to users' social graph, allowing the applications to become "social." Applications can be running
within the Facebook site (e.g., Zynga's FarmVille, Spotify or the Coca-Cola page within Facebook), on
an external Web Site (e.g., www.spotify.com or www.nytimes.com showing users which songs their
Facebook friends are listening to or which stories they have read), or as an app on an Android or iOS
mobile device.
∑ As a consequence, the Platform brings two benefits to Facebook:
- First, it increases the functionality and attractiveness of facebook.com as third party applications will
presumably enrich the experience of Facebook users, driving further engagement. In addition, to the
extent that third party developers monetize their applications within Facebook, e.g., Zynga selling a
virtual cow, developers are currently and will likely continue to be required to collect payment for their
virtual cows (or similar) with Facebook Credits, Facebook's payment mechanism. In this case,
Facebook will benefit financially by charging a fee (currently, the fee Facebook charges developers is
typically 30%).
- Second, the Platform extends "social" interactions to the whole Web and to mobile apps. Since the
information in a user's social graph is the key element required to make the Web social, success will
turn Facebook's social graph into critical infrastructure across the Web. Importantly, if advertising with
Facebook DCF Valuation
($B)
Sum of PV of cash flows (2012 - 2025)29,692
PV of Terminal Value 21,839
Net Cash 3,908
Enterprise Value 55,438
Terminal growth rate 0.0%
WACC 10.4%
Terminal Multiple 9.6x
Free Cash Flow 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
NOPLAT 902 2,052 2,690 3,418 4,157 4,911 5,475 5,996 6,473 6,925 7,322 7,687 8,025 8,342
Adjustments 517 419 446 514 523 521 704 865 1,005 1,133 1,250 1,359 1,465 1,566
Capex (833) (1,040) (1,212) (1,353) (1,448) (1,517) (1,573) (1,623) (1,672) (1,731) (1,830) (1,922) (2,006) (2,086)
PPE under capital leases (441) (370) (289) (214) (149) (99) (61) (33) (13) - - - - -
FCF- Valuation 146 1,060 1,636 2,364 3,084 3,817 4,545 5,204 5,793 6,327 6,741 7,124 7,484 7,823
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social components turn out to be highly effective, then Facebook will be well positioned to serve social
ads to publishers across the whole Web
7
.
∑ The Platform extends Facebook into third-party applications, Web sites, and iOS and Android mobile
apps, and gives applications and Web sites access to a user's social graph data:
- The Facebook Platform allows applications to interact with the social graph of users logged on to
Facebook. Perhaps the best way to think of this is that when a user is logged on to Facebook, Facebook
gets extended into other applications through "Social Plug-Ins". For example, a "Like" button on a
Web page such as YouTube, allows a user to interact with Facebook and his or her graph from
YouTube's page. When the user "Likes" a YouTube video, in YouTube's site, that event is recorded in
the user's Facebook social graph and shared with the user's friends. This is mechanically very simple to
implement (which explains the fast proliferation of Like buttons across the Web) and requires no
authentication and user permission
8
, since the user is interacting with his or her own Facebook graph
through another application (and the application does not have access to the user graph).
- Second, Facebook allows applications to access a user's social graph, through the OpenGraph
Application Programming Interface (API), after authenticating the user (e.g., through Facebook
Connect) and obtaining the user's permission to share data from the user's social graph. Applications
can access a user's social graph information (in line with a users' permissions) and use that information
within Facebook (e.g., in a brand's page or as game within Facebook
9
), or outside of Facebook, e.g., in
a third party Web site. While more complex to implement, as it requires user authentication and
permission, using the API allows applications to create much richer, customized social experiences.
∑ How large could social advertising be? It is relatively early days when it comes to social advertising.
Some of the early successes of certain campaigns and advertisers are encouraging, but not at all
dispositive.
∑ It is not hard to find a couple, a dozen or fifty cases when social advertising performs "well." One just
needs to talk to or read the marketing decks of any of the hundreds of companies in the Facebook
ecosystem. For example, one oil company managed to acquire hundreds of thousands of "Likes" to its
Facebook page (a pre-requisite and enabler for Facebook viral marketing) at much lower cost than before
through social advertising. An educational institution used Facebook advertising to acquire qualified
leads at a cost per lead 30%below its average acquisition cost. Another advertiser reported to us that
their experience suggested that the effectiveness of sponsored stories was more than double that of
regular Facebook ad units. These many examples are certainly positive indications of the potential of
social advertising. However, because the ROI of certain social ads is hard to measure and the evidence
we have is still anecdotal and highly variable across campaigns, advertisers and verticals, it is unclear
how much companies will be willing to spend in social advertising to advertise their brand, to acquire
"Likes" to their Facebook page to increase their Facebook reach, or to drive traffic to their own Web site.
∑ In our view there are three important uncertainties investors should consider:
- First, whether or not social advertising will deliver attractive ROIs to advertisers "at scale." For
Facebook to disrupt the advertising world (on and offline) in a way akin to what Google did, it needs
to offer ROIs to a broad swath of advertisers that are materially superior to alternatives, on and offline.
7
In theory, Facebook could allow publishers access to a user graph through the API's and enable them to decide which
ad to publish to a given user. We believe privacy concerns will instead lead Facebook towards an ad network model.
8
The users must, of course, be logged on to Facebook.com
9
Games generally use Facebook Canvas as a way to interact with users without leaving Facebook)
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- Second, for Facebook's platform strategy to work in a way that allows Facebook to monetize it
directly
10
, social ads yield to third party publishers needs to be comparable to or better than their
current best alternative, including contextual display ads served by, e.g., Google AdSense. While our
discussion with ad buyers and analytics firms suggests that performance metrics (CPMs, CTRs,
CPCs
11
) for Facebook ads and for AdSense display ads vary materially across properties, campaigns
and verticals, there seems to be widespread agreement that "typical" performance of social ads
(Exhibit 23) is still not on par with AdSense. We believe AdSense metrics today are often several
times higher than the CPMs implied by the numbers in Exhibit 23. For example, our industry contacts
suggest CPCs for AdSense are in general in the range of $1.50-$2.50, about 2-3 times the typical CPC
for Facebook. In addition, AdSense publishers often get CTRs 1.5-2 times higher than the Facebook
CTRs reported on Exhibit 23. These imply that, on average, Facebook CPMs (and hence yields to
publishers) are much lower (roughly 3-4 times) than AdSense, and therefore unattractive to many third
party publishers. For Facebook's platform play to work broadly, it will have to improve (CPCs, CTRs )
CPMs materially from the levels reported in Exhibit 23 to compete with AdSense.
Exhibit 23
CTR and CPC for Facebook Advertising Across Verticals
Source: Webtrends, 2011
10
The platform strategy will also bring indirect benefits to facebook.com, as it would, for example, augment the social
graph with information about users activities across the Web, presumably improving ad targetability within
Facebook.com
11
CPM= cost per mille, is the price to an advertiser of one thousand ad impressions; CPC=cost per click, is the amount
an advertiser pays a publisher every time a user clicks on the advertisers' ad; CTR=click-through rate is the rate at
which users click on ad impressions. CPM=CPC*CTR, modulo a constant.
$ 1.27
$ 1.30
$ 0.67
$ 0.79
$ 0.82
$ 0.80
$ 0.67
$ 0.54
$ 0.56
$ 0.38
$ 0.53
$ 0.50
$ 0.37
$ 0.50
$ 0.29
$ 0.26
$ 0.36
$ 0.31
$ 0.25
$ 0.12
-2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50
HealthCare
Internet and Software
Conference and Events
Grocery Stores
Telecommunications
Financial ervices
Local Services
Housing and Real Estate
Misc
Consumer Packaged Goods
Restaurants
Retail ers
Cosmetics
Startups
Non-profits
Automotive
Travel
E-Commerce
Media and Entertainment
Tabloids and Blogs
0.165%
0.154%
0.089%
0.077%
0.082%
0.086%
0.065%
0.066%
0.070%
0.072%
0.074%
0.021%
0.028%
0.029%
0.029%
0.030%
0.033%
0.058%
0.058%
0.011%
CPC >> << CTR
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- Third, even if ROIs of social ads turn out to be better to advertisers, a big if, it is unclear whether
advertisers, particularly brand advertisers, will have the tools to measure social advertising ROI
accurately. In other words, Facebook's success depends on ROIs being better and on advertisers being
able to measure and determine that somewhat unambiguously (so that they can act and shift budgets).
We believe that this may turn out to be a challenge for Facebook.
∑ In our bullish scenario, social advertising disrupts the existing advertising landscape and triggers material
shifts of budgets. The last time this happened was when Google radically improved search and the
associated monetization mechanism, so we will use Google's revenue trajectory as a benchmark for
Facebook's potential trajectory. However, in view of the challenges above, we think it is plausible to
assume that social advertising spend growth will be slower than the growth trajectory of Google's
revenues, for two reasons.
- First, to the extent that social advertising will be a solution to brand advertisers, the lack of well-
accepted and understood performance metrics, analytics tools and ROI evaluation processes for
Internet brand advertising will slow down the shifting of dollars from other brand advertising media
(e.g., print or TV) or from other marketing spend pools. Measurement of ROI in brand advertising
campaigns in general is more of an art than a science (certainly when compared to measuring ROI for
direct response), often involving complex, non-transparent attribution models and indirect metrics such
as GRPs (gross rating points). While direct response, including search advertising ROI can be
computed on the basis of metrics with clear and somewhat unambiguous connection to value creation
(e.g., leads, conversions, sales), Internet brand advertising faces all the issues of brand advertising, plus
the fact that even some of the indirect metrics used in other media (such as GRPs) are not well-
accepted currency in the Internet. This could change, e.g., if Nielsen's efforts such as OCR and XCR to
extend the GRP currency from the TV world into the Internet and create a unified, cross-medium GRP
metric, succeeds
12
.
- Second, for social advertising to attract a large portion of performance advertising dollars, it would
have to outperform Google's paid search. Paid search sets a high ROI bar, it is a major driver of traffic
to most commercial Web properties, and hence advertisers will be reluctant to shift budgets quickly
unless the alternative is demonstrably much better. In fact, we think Google's strong incumbent
position in Internet performance advertising will lead Facebook toward making a bet on prioritizing
brand advertising dollars.
∑ In 2004, Google booked $3.2 billion in revenues, which was nearly evenly divided between Google
Websites (primarily search on google.com) and the Google network revenues (primarily AdSense for
search). Thus, in 2004, Google's advertising revenues were roughly in line with Facebook's in 2011
($3.15 billion). In the 15 years following 2004, we forecast that search at google.com will grow nearly
3700% (~30% CAGR) to revenues of $58 billion (Exhibit 24). Given the limitations we outlined above
related to the rate at which brand advertising effectiveness can be measured and budgets shift, we will
assume that for the next 15 years social advertising revenues at facebook.com could grow 75% as much
as google.com revenues are expected to grow in a similar time span. In other words, we will assume that
the shifts in ad budgets due to social advertising are 75% of what we have seen due to search (Exhibit
25). This assumption is very important for valuation purposes, and we provide a sensitivity analysis
below (Exhibit 29).
12
We believe this explains why Facebook is one of Nielsen's OCR early publisher partners
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Exhibit 24
Google websites revenues (www.google.com portal), excluding YouTube gross revenue estimates ($ millions)
Source: Bernstein analysis, company reports
Exhibit 25
Estimated Google.com search revenues vs. Facebook.com revenues 15 years after booking $3B in revenues
Source: Bernstein analysis
∑ In this bullish case, revenues come also from the Facebook Platform, as third party sites would also seek
to publish social ads served by Facebook (given that the underlying hypothesis of the bullish case is that
social ads perform better than typical display). The parallel here again is Google, but in this case
AdSense, which account for the vast majority of Google's Network revenues. Therefore, in the bullish
case for the Facebook Platform, we assume its revenue trajectory, which we expect to start to be
1,589
3,377
6,333
10,501
14,166
15,226
18,451
24,090
28,634
33,604
38,668
43,801
49,065
53,944
58,423
2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E
3700% growth,
30% CAGR
58
44
Google.com search revenues ex-Youtube gross revenues (2018) Facebook.com revenues (2025)
75%
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meaningful in 2013, will grow at 75% of the growth rate we expect to see from Google Network
revenues in the 12 year period between 2003 (when Google's Network revenue was around $600 million)
and 2014. Again, this number is an important driver of the bull case valuation and we will show a
sensitivity analysis below (Exhibit 29).
∑ These two assumptions lead us to 2017 revenues of about $22 billion for Facebook, with EBITDA of
$11.9 billion (Exhibit 26). In 2013 under this scenario, we would see an EBITDA of $4.5 billion, a 46%
CAGR versus 2011. Given that in 4Q11 advertising revenues grew 44% year-on-year, down from 77% in
3Q11 and 69% for all of 2011, this is quite aggressive. However, the premise of the bull case is the
emergence of social advertising as a major disruptor of the advertising space, and we think this could
occur in the next two years, given Facebook's scale and the experience it (and the ecosystem) have
accumulated in 2011 with social advertising. It is an aggressive case in our view, but not implausible.
∑ With this revenue trajectory, our long term DCF model yields an enterprise value of $100 billion for
Facebook (Exhibit 27).
∑ Of course, the EV we got in Exhibit 27 is dependent on our choice of WACC. As an illustration, if we
set the WACC at 11%, the EV for the Bull case would be $93 billion and $105 billion for a WACC of
10%.
Exhibit 26
Facebook.com income statement : Bull case
Source: Bernstein analysis
Income Statement 2011 2012E 2013E 2014E 2015E 2016E 2017E
Revenue 3,711 5,454 7,959 11,125 14,698 18,616 22,331
Advertising revenue 3,154 4,820 7,278 10,370 13,778 17,616 21,267
Payments and other fees revenue 557 634 680 756 920 1,000 1,064
Cost of revenue 860 1,235 1,762 2,412 3,129 3,902 4,620
Gross Profits 2,851 4,219 6,197 8,713 11,569 14,714 17,712
Total Operating Expenses 1,095 1,632 2,412 3,411 4,553 5,818 7,032
Marketing and sales 427 615 881 1,209 1,572 1,962 2,325
Research and development 388 592 895 1,290 1,750 2,268 2,772
General and administrative 280 424 636 912 1,231 1,588 1,935
Income from operations 1,756 1,620 3,785 5,302 7,015 8,895 10,679
Non-operating items/one offs - 968 - - - - -
EBIT 1,756 1,620 3,785 5,302 7,015 8,895 10,679
EBITDA* 2,079 3,338 4,518 6,149 8,011 10,013 11,862
Margins and Growth 2011 2012E 2013E 2014E 2015E 2016E 2017E
Gross Margin 77% 77% 78% 78% 79% 79% 79%
Operating Margin 47% 30% 48% 48% 48% 48% 48%
EBITDA Margin 56% 43% 57% 55% 55% 54% 53%
Y/Y growth in Revenue 88% 47% 46% 40% 32% 27% 20%
Y/Y growth in Gross Profits 93% 48% 47% 41% 33% 27% 20%
Y/Y growth in Income from operations 70% (8)% 134% 40% 32% 27% 20%
Y/Y growth in EBITDA 78% 14% 91% 36% 30% 25% 18%
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Exhibit 27
Facebook.com : DCF Valuation : Bull case
Source: Bernstein analysis
∑ Is the advertising pool big enough for two big fish(es)? Perhaps the first hurdle the bullish estimates
above need to clear to be judged plausible is to establish whether or not there is enough money in the
addressable market for Facebook to grow that large. We think this indeed the case.
∑ Exhibit 28 shows that in our bullish case, Facebook's $22 billion 2017 (gross) revenues would account
for less than 13% of our current forecast of total online advertising spend, which we estimate at $165
billion. Google, whose 2017 (gross) revenues we expect to reach $90 billion, would account for about
54% of our current forecast. For comparison, Google's 2011 revenues were $38 billion, while Magna
Global estimates that the 2011 global online advertising spend reached $79 billion, so Google is already
48% of the total online spend, while Facebook's advertising revenues corresponded to roughly 4% of
online revenues, for a total of 52%.
Exhibit 28
Google and Facebook 2017E Gross Revenues vs. Addressable Market ($ billions)
Source: Bernstein analysis and estimates
Facebook DCF Valuation
($B)
Sum of PV of cash flows (2012 - 2025)50,080
PV of Terminal Value 45,968
Net Cash 3,908
Enterprise Value 99,956
Terminal growth rate 0.0%
WACC 10.4%
Terminal Multiple 9.6x
Free Cash Flow 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
NOPLAT 999 2,435 3,552 4,887 6,434 8,010 9,267 10,555 11,936 13,300 14,635 15,944 17,132 18,225
Adjustments 459 274 263 362 369 459 809 1,073 1,282 1,569 1,827 2,111 2,460 2,798
Capex (886) (1,234) (1,600) (1,936) (2,241) (2,473) (2,662) (2,857) (3,084) (3,325) (3,659) (3,986) (4,283) (4,556)
PPE under capital leases (469) (440) (381) (306) (231) (161) (103) (58) (23) - - - - -
FCF- Valuation 103 1,036 1,833 3,008 4,331 5,835 7,312 8,712 10,111 11,543 12,804 14,069 15,308 16,466
1,200
620
165
85
22
Global Consumer
Marketing Spend
Global Advertising
Spend
Global Online Spend Google (Gross)
revenues
Facebook (Gross)
revenues
0 - 15
0 - 15
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∑ In the bullish Facebook case, Google and Facebook's gross revenues would account for about two-thirds
of the total online advertising spend or, to be more precise (and our reason for being this pedantic will be
clear soon), two-thirds of our current estimate of the total online advertising spend. We find that
aggressive but plausible. It becomes even more plausible if we take into consideration the fact that the
size of the advertising market in general and the online advertising market in particular are not
independent of Facebook's trajectory if we assume that social advertising will be a major disruption.
- If online social advertising becomes a higher ROI (brand) advertising medium than other current
alternatives such as print, radio, out-of-home and TV, then we would expect the 2017 online
advertising spend to be higher than our current estimate of $165 billion. How much higher? It is hard
to tell precisely since some of the social advertising spend would likely be funded partly by what
would otherwise have been display spend, and partly by influx of dollars from other media. Our best
estimate is that the online advertising spend could grow to about $180 billion, so that Google and
Facebook would account for 60% of total online revenues in 2017, up from 52% today.
- Of course, incremental online advertising spend has to come from somewhere. While in the near term
it is highly likely to come from other advertising media, with a five year horizon we believe there is a
strong chance that money will flow into the online advertising budget from other elements of the much
larger marketing budget (e.g., coupons, events, promotions). We estimate that the overall marketing
budget of consumer companies worldwide to be in the order of $1.2 trillion by 2017.
∑ The assumption that Facebook will grow at 75% of the rate at which Google grew (both the main site and
the network) was an important driver of our valuation for the Bull Case. Exhibit 29 shows a sensitivity
analysis of the estimated enterprise value for Facebook as we vary the 75% independently for
facebook.com and for the network.
Exhibit 29
Sensitivity of Facebook Enterprise Value to Facebook.com and Facebook Network Revenue Growth
Source: Bernstein analysis
Facebook.com rev. growth as a % of Google search 15-yr growth
50% 66% 75% 100%
66% $ 71 $ 89 $ 98 $ 118
75% $ 72 $ 90 $ 99 $ 119
100% $ 74 $ 92 $ 101 $ 121
125% $ 77 $ 95 $ 103 $ 124
Facebook network revenue
growth as a % of Google
network 12-yr revenue growth
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Looking at comparables
∑ While one could argue with some merit that Facebook is unique (and in some ways more unique than
others), it is helpful to contrast our bear and bull valuations with the closest comparables (see Exhibit
30), including Google at the end of 1Q05, when its revenues were roughly in line with Facebook's 2011
revenues. We have added the $473 million in capital leases to Facebook's 2011 capex to calculate its
capital intensity.
Exhibit 30
Potential Comparables to Facebook
Source: Bloomberg, FactSet, Bernstein analysis
∑ Our bear case EV of $60 billion and estimated 2012 EBITDA of $3.2 billion (a figure that excludes the
charges associated with the expensing of the pre-2011 RSUs, whose vesting is conditioned on the IPO)
corresponds an EV/EBITDA multiple of 19 times, materially lower than Google's multiple around 3/2005
when its revenues were similar to Facebook's 2011 revenues, and its revenue growth and EBITDA
margins were also similar. We attribute this difference to the fact that for the next several years Facebook
will have higher capital intensity than Google had at the time (Facebook investment in PP&E, including
the value of capital leases, were about 29% of 2011 revenues, versus Google's investment of 10% of
revenues in 2005), and the long-term growth expectations of search at the time, which the market cap
numbers show clearly underestimated Google's potential, but we think were more aggressive than our
view of the display market in the bear case, as we expect Facebook revenue growth rate to decrease to
31% in 2013 and 26% in 2014.
∑ Our bull case EV of $100 billion and estimated 2012 EBITDA of $3.3 billion corresponds to an
EV/EBITDA multiple of 30 times, again a premium over Google's 3/05 numbers and all other comps in
our list, except LinkedIn, which some might argue is the closest comp for Facebook. Whether or not
Facebook should trade at a premium or at a discount compared to LinkedIn depends in large part on the
value the market will ascribe to future opportunities the business may have, in other words, the option
value created by the company's assets.
Company Ticker Market Cap ($B) LTM Revenues
EV/(NTM
consensus
EBITDA)
NTM Cons.
Revenue Growth
NTM Cons.
EBITDA margin
Zynga ZNGA 8.7 1,226 15.7x 23% 30%
Groupon GRPN 8.9 1,808 15.7x 38% 19%
LinkedIn LNKD 10.0 614 47.0x 59% 21%
Priceline PCLN 38.1 4,667 16.1x 25% 37%
eBay EBAY 46.7 12,225 8.7x 17% 32%
Google current GOOG 205.0 30,713 8.2x 20% 53%
Google 3/2005 GOOG 49.6 3,189 26.6x 36% 55%
Facebook - Bear Case FB 3,711 18.7x 38% 58%
Facebook - Bull Case FB 3,711 30.0x 47% 58%
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The Option Value of Facebook's Assets
∑ It is possible, and in fact we believe likely, that the market will attribute some value to Facebook based
on the options it has to use its assets and capabilities to enter new businesses and pursue new
opportunities. Some of the commonly mentioned opportunities include payments, credit, banking,
content distribution, and consumer electronics (e.g., the Facebook mobile phone).
∑ In fact, as we pointed out above, Facebook's platform could turn out to be a major disruptive force in the
Internet. If facebook.com indeed becomes an alternative to the open Web to a large portion of its users,
which will likely exceed 1 billion in the next 12 months, and/or succeeds in its drive to make the whole
Web social thus making its platform "critical infrastructure" to the whole Internet, it will be in position to
capture value from a wide range of interactions and services on the Internet, including and likely beyond
the aforementioned ones.
∑ We don't believe it is possible or helpful to try to guess which markets Facebook could enter, the
business models, and how success would look like. There is too much uncertainty. For example, we are
highly skeptical that in July 2004, roughly one month before Google went public, anyone could have
guessed that Google would own anything like YouTube
13
(which was founded in 2005), the largest
(short-form) video site on the Internet. We estimate that today YouTube contributes $10 to $15 billion to
Google's enterprise value.
∑ Instead of trying to guess the future business opportunities the company will pursue, we propose to size
the option value associated with Facebook today by trying to assign a value to Facebook's most
distinctive asset, the data in the social graph of its nearly 1 billion users.
∑ There is a market today for consumer information. It is different from Facebook and what it does today in
many important ways (e.g., the specific uses of the data, regulatory oversight, how the underlying data
are generated and aggregated and what the data are, etc). There is really no reason to believe that
Facebook will use its social graph data in similar ways. However, we believe that studying this market is
helpful is getting an estimate of the potential value for Facebook's social graph data.
∑ The main companies in that market are the credit bureaus, Experian, Equifax, TransUnion, Innovis, their
international counterparts (e.g., CIC in Japan), FICO, multiple companies in the consumer data business
such as Acxiom, Targus, Rapleaf, as well as business units of larger companies such as Pearson (which
owns ChoicePoint). While these companies are in multiple lines of business, their core asset is the
consumer information. We estimate that these companies have an aggregate enterprise value of roughly
$42 billion (Exhibit 31), and that their main asset is the information they have about roughly 600 million
consumers worldwide. Of course, someone's utility payment history is very different from their list of
friends. However, it is possible that one's list of friends will turn out to be, over time, more, equally or
nearly as predictive of the likelihood that someone will default in their mortgage as their utility payment
history.
∑ Since Facebook will likely reach 1 billion users by the end of 2012, and (importantly) assuming that the
EV per user is roughly the same as we seek to value the data in the social graph, we get a valuation for
Facebook's strategic options from the social graph of up to $50 billion (Exhibit 31). One could argue that
Facebook's social graph could become even more valuable than that, as the credit bureaus have to pay for
data acquisition and royalties, while user's give Facebook their information and the credit bureaus are
under strict regulatory scrutiny that limits how much value they can extract from the data they have. Of
course, the reverse is also true, as one can argue that the data the bureaus have are (at least as far as we
know) more valuable and that using the EV of real businesses to value an information asset is a stretch.
13
To be sure, the counterpart to that is the emergence of Facebook to displace MySpace and all the Schumpeterian
risks associated with being an Internet company
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We sympathize with all the objections, but believe this provides a useful benchmark to investors to think
about the option value for Facebook's key assets
14
.
Exhibit 31
Aggregate Value of Worldwide Credit Bureaus and Implied Value of Facebook's Social Graph
Source: Bernstein analysis and estimates
∑ We recognize that this $50 billion number may very well prove way too low in the future (if the company
succeeds in its objectives of making the whole Web social), or way too high, if social advertising fails to
attract advertising dollars "at scale," and Facebook ends up without the resources to pursue its more
ambitious objectives. We also recognize the differences between the types of data, business models,
regulatory environment, and, importantly, the ability to grow and enrich the dataset between the credit
bureaus and consumer information companies and Facebook. However, we think this comparison
provides a helpful yardstick for investors trying to size the value of Facebook's key asset.
What Should Be Facebook's EV/EBITDA multiple?
∑ We think investors seeking to value Facebook should ask and answer three questions:
- Do we believe
15
Facebook will succeed in its ambition to transform the Web?
- How much do we believe in the potential of social advertising to attract (brand) advertising dollars and
Facebook to grow revenues compared, e.g, to Google's history?
- How much credit do we give Facebook for the option value associated with the social graph and other
businesses it may enter?
∑ Investors who think the market will ascribe a value to Facebook that implies a high probability of success
in transforming the whole Web will have no trouble coming up with a bull case way above the $150
billion enterprise value we get by adding our bullish case valuation of $100 billion to the full option
value of $150 billion, particularly if they are very long-term investors. For example, LinkedIn is trading
at 47 times EV/EBITDA and with our 2012 EBITDA forecast of $3.34 billion (excluding the impact of
the vesting of the pre-2011 RSUs) for Facebook, that gets to an EV north of $157 billion...and once you
14
And it is not very different from assuming that Zynga, RenRen, Groupon, or even Google are comparable to
Facebook.
15
To be more precise, investors should ask themselves what they believe the market will believe…
Credit Bureaus Enterprise Value ($B)
Transunion $ 3.5
Experian $ 17.3
Equifax $ 6.2
AcXiom $ 1.3
Choicepoint $ 3.6
Others $ 5.0
Total $ 36.9
Estimated population covered (millions) 650
EV/person ($) $ 56.8
Estimated 2012 MAUs for Facebook (millions) 920
Implied Value for Facebook social graph ($ billions) $ 52
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believe the whole Web will be social and Facebook will be the engine behind this transformation, this
number may actually prove small.
∑ However, those who believe Facebook will not enjoy the benefit of the doubt long enough, given their
investment horizon, will then have to make a judgment on the other two questions. Exhibit 32 shows a
range of EV/(NTM EBITDA) multiples depending on the relative likelihood of the bear versus bull
scenario, and on the "optionality premium" associated with potential new business opportunities. The
ultimate multiple ascribed to Facebook will in the end depend on the implicit answers the market will
give to each of these questions.
Exhibit 32
Potential EV/(NTM EBITDA) Multiples Under Different Scenarios and Premiums for Optionality
Source: Bernstein analysis
Four Major Risks: Balancing Monetization and User Experience, Privacy Regulation, Competition from Google,
Regulation, and Governance
∑ Facebook faces all the usual risks associated with doing business in the Internet, where the barriers to
entry are very low, and with rapidly growing companies with many (uncertain) opportunities. Of course,
it is possible that a new site, application, or platform will emerge and drive fundamental change in
consumer behavior online, making Facebook much less relevant. And one does not have to make up new
ideas to imagine that happening. This could very well happen due to the success of existing companies.
Whether it is (or was, given the acquisition by Facebook) Instagram growing an alternative social
environment around photo exchange, or Pinterest first becoming a "social wish list or shopping cart," and
growing from there (if it does not get scooped up by one the online giants before that), or Twitter
capturing brand advertising dollars and competing effectively with Facebook, or Personal succeeding in
its attempt to convince consumers to safeguard and selectively monetize their information in a vault, thus
raising the possibility that consumers will attribute value to the data that today they share with Facebook
in exchange for the service, living with the risk of Schumpeterian creative destruction is normal course of
business for Internet investors.
∑ We have tried to incorporate these risks it into our analysis, to the extent that we could, by setting a
terminal growth rate of 0% in our long term DCF model (Exhibit 22 and Exhibit 27)
16
. This risk is not
16
We call it the creative destruction terminal growth rate
$ - $ 25 $ 50 $ 75 $ 100
Least Bullish 0 16.1x 24.0x 31.9x 39.7x 47.6x
1 17.4x 25.2x 33.0x 40.8x 48.7x
2 18.6x 26.4x 34.2x 42.0x 49.7x
3 19.9x 27.6x 35.3x 43.1x 50.8x
4 21.1x 28.8x 36.5x 44.2x 51.9x
5 22.3x 30.0x 37.7x 45.3x 53.0x
6 23.6x 31.2x 38.8x 46.5x 54.1x
7 24.8x 32.4x 40.0x 47.6x 55.2x
8 26.0x 33.6x 41.2x 48.7x 56.3x
9 27.3x 34.8x 42.3x 49.8x 57.4x
Most Bullish 10 28.5x 36.0x 43.5x 51.0x 58.5x
Optionality Premium ($ billions)
Belief in Social Advertising
on a Scale of 0 - 10
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unique to Facebook, of course, and one could argue that given its size and growth rate, as well as the
strong network effects associated with its business, the risks are real but limited.
∑ In addition, there are material execution risks, as the company seeks to grow its customer base, sales and
marketing capabilities, infrastructure, and R&D at a pace rarely seen. Again, this is not a Facebook
specific risk and par for the course in Internet investing.
∑ However, we believe there are a few risks that are Facebook-specific and should be the focus of potential
Facebook investors, of which the most important are the issues associated with balancing monetization
and user experience, the risk that privacy regulation could disrupt the company's ability to monetize the
social graph, and competition, primarily but not exclusively from Google.
∑ Balancing Monetization and User Experience. In the not-so-distant past, Facebook saw user
experience compromised due to the high virality of certain applications (e.g., Zynga games such as
FarmVille) and took steps to protect the user experience by decreasing the frequency and number of
updates delivered to people in, e.g., a FarmVille players social graph. Those steps had strong
consequences on the growth rate of game publishers within Facebook as we discussed above, and on the
associated revenue trajectory. It is a clear illustration of the challenge the company faces balancing user
experience and monetization.
∑ While there is much hope surrounding new social ads such as sponsored stories, including stories inserted
into a Facebook users' Newsfeed, perhaps the most valuable real-estate in the site, these tend to be more
intrusive to the user experience, potentially generating contention between the quality of the user
experience and Facebook's ability to monetize that user's engagement effectively. It is unclear whether
and how Facebook will be able to scale up advertising monetization on the site while preserving the
quality of the user experience, in ways similar to what Google achieved with its remarkably simple yet
highly effective design of its search engine response page. This may become particularly acute for certain
important and valuable user segments such as young adults, who may be heavy users, and hence with
many friends (a dense graph) and within the reach of many advertising campaigns, and who are also
attractive targets to many advertisers. This is difficult to quantify and model, but it seems to us it is a
fundamental problem Facebook will have to address. Of course, Facebook can limit the inventory
available to advertisers and seek to compensate that limitation through increased pricing, but it is not
clear to us this is a recipe of success to a business with its ambitions.
∑ Privacy Regulation. Privacy regulation can affect all Internet companies, but Facebook is probably
disproportionately exposed to legislative and regulatory action in privacy. In the US, Facebook is subject
to the requirements of a consent decree
17
that put material constraints on its ability to share certain types
of consumer data (particularly PII, personally identifiable information) with third parties. The FTC-
Facebook consent decree is nearly identical to the FTC-Google consent decree, suggesting that they
provide a strong indication of the agency's current thinking and framework to balance consumer privacy
and innovation in the Internet. While there are several bills in the US Congress, some with support from
the administration, dealing with consumer privacy, including specifically online privacy, our reading of
the current proposals suggests that they are primarily targeted at the overall "cookie ecosystem,"
companies whose business is the trading of consumer information. We do not think the bills currently
under consideration would create material incremental (given the requirements of the consent decree)
limitations on Facebook.
∑ The situation in Europe requires separate analysis, for two reasons. First, because Europe has had, and
will continue to have stricter laws and regulations on consumer privacy. Second, because Facebook is an
American company, which, like Google and other Internet companies, will, over time, compete for value
17
http://ftc.gov/os/caselist/0923184/111129facebookagree.pdf
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with European stakeholders across the value chain (e.g., CE manufacturers and telcos). Privacy
regulation is a great tool for policy makers to favor one or another set of stakeholders in the name of
consumer protection.
∑ One can imagine, for example, a regulator trying to create a rule that says that if a user agrees to share his
or her data with an application, data about the users' Facebook friends cannot be shared with the
application or application developer unless those friends opt-in. This could have material negative impact
on Facebook's ability to monetize the social graph. While not impossible, we think this scenario is
currently unlikely.
∑ Our current view is that Facebook's huge success and popularity, as well as the growing global ecosystem
surrounding it, including both start-ups and established brand who see it as an increasingly important
advertising channel, and lack of clear direct competitors in Europe, make it highly unlikely that we will
see proactive regulatory steps with the objective of curtailing Facebook's commercial success. To be sure,
highly unlikely is not impossible and Facebook's potential investors should pay attention to the European
privacy regulation landscape going forward.
∑ Competition: We believe Google's entry into social and focus on Google Plus, as evidenced by its
preeminent role in Larry Page's letter to shareholders and the new incentive structure the company put in
place seeking to drive employees to make products "more social" is a reaction to the potential disruption
that Facebook could cause across the Web (see Exhibit 1) and across the advertising ecosystem.
∑ On the user side, the growth of facebook.com as an alternative to the open Web should be a concern to
Google as it might have negative impact on search query growth rates. It is impossible to evaluate with
any precision the past impact of Facebook on the demand for search since we do not have a "control" (we
can't really tell what would have happened to query growth if Facebook did not exist). The data we have
suggest that query growth was robust over the last several years, despite Facebook's fast growth. For
example, we think Google's (fixed) search queries grew more than 60% over the last two years as
Facebook engagement mushroomed from 2% of US Internet users' aggregate time online to about 16%.
∑ However, if facebook.com continues to become a larger and larger portion of users' time and,
importantly, activities on the Internet, outside the open Web and out of reach of Google's indexing and
search, then it is possible that demand for search would decrease. In extremis, so much would transpire
inside the Facebook walled garden that Facebook's search and discovery engine, which it will most
certainly have and evolve as its property grows, would replace Google search for a growing number of
queries
18
.
∑ Google seems to have had some success acquiring Google Plus users, which is not surprising given the
emphasis it has placed on the product, even changing the design of its search home page and other
properties to integrate Google Plus (or, as Google puts it, integrate all of its services). However, the
reported engagement levels are still disappointing. For example, comScore reported that on average,
Google Plus users spent only 5 minutes on site in December 2011, which is far below the average of 423
minutes (7 hours) that it reported Facebook users spent on site during the same period. And these
numbers exclude mobile users, which we suspect would make the disparity greater.
∑ On the advertiser or revenue side, it is clear to us that Google will be a formidable competitor to
Facebook. We have discussed AdSense as the incumbent platform in the Web, and pointed out that
Facebook will have to deliver yields to advertisers that match or exceed AdSense to create a "social
network." In addition, Google's display strategy, centered on the Ad Exchange, clearly is seeking to
capture a large portion of the display advertising spend from both direct response and brand advertisers.
18
To be sure, we think this is a low likelihood scenario and that Google will continue to be the pre-eminent search
engine in the Web for years to come, with limited impact from Facebook on its growth in search.
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As Google uses technology and the large amounts of user data it collects (we note the recent change in its
privacy policies, a non-trivial step with clear regulatory risk) to improve the functionality, targeting,
analytics, and ultimately ROI and yield associated with display impressions traded on its platform, it will
raise the bar Facebook will have to clear to attract online advertising dollars to its platform. As we
pointed out above, we think much will depend on whether or not "social advertising' will materially
outperform traditional display meaningfully for a large portion of ad budgets.
∑ In large part because of the strong network effects associated with social and Facebook's platform
approach, which gives it increased flexibility to adapt and evolve the user experience
19
, we think Google
faces a material challenge in creating a social network that can compete with Facebook. However, given
Google's resources and position in the Web, it clearly poses a material threat to Facebook going forward,
which cannot be dismissed.
∑ Governance. Mark Zuckerberg controls and will continue to control the vast majority of votes directly or
by proxy, even after a Facebook IPO. The structure of the board of directors and the rules associated with
appointments could potentially limit the influence and leverage of external shareholders. Of course, we
have seen a similar story before with Google where Larry Page, Sergei Brin and Eric Schmidt control the
majority of the voting stock. Early signs (compare, e.g., the way Google allocated its IPO shares and the
process currently under way with Facebook) suggest that Facebook will be more investor friendly than
Google, but the risk remains: we would not be surprised if three or four years from now we hear
Facebook investors discussing the levels of disclosure and guidance the company provides, as well as
worrying about the process the company follows to take decisions relative to investing in uncertain long-
term opportunities and managing near-term financial performance.
19
Despite having much of its code developed in PHP, which we suspect will create scalability and manageability
problems going forward.
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Disclosure Appendix
Valuation Methodology
U.S. Internet
We value the stocks in our coverage based on our forecast of 2013 EPS and on the historical price-to-
forward-earnings multiple relative to the S&P500's. We use our EPS earnings estimate to calculate the
expected earnings growth in 2013 and select the relative PFE multiple based on that growth rate and recent
history. We benchmark the target price with the outcome of a long-term DCF model, which assumes
terminal growth rate of 0%.
Risks
U.S. Internet
Sector risks:
- Global economic conditions: Consumer and advertising spend are the main drivers of revenue for all
companies in our coverage, and deterioration of economic conditions could have a material
negativeimpact on revenues and earnings of all companies in our coverage.
- Cyber-security: All companies in our coverage depend on the global Internet. Their data (including
user-data), infrastructure, and services could be compromised either by malicious attackers or by an
"act of God" that compromises major portions of their Internet infrastructure. This could have a major
negative impact on revenues and earnings of all companies in our coverage.
- Network neutrality: Companies in our coverage pay telecommunications service providers for
terminating their traffic in accordance to local regulation and business practices, either directly or
through third-parties (e.g., CDNs). They do not pay to ensure that their traffic is delivered to the end
user with a higher or lower priority than other traffic from the Internet. If fixed or mobile
telecommunications service providers were to charge Internet companies for the delivery of bits
beyond the usual traffic termination charges, the revenues, earnings and stock prices of companies in
our coverage could be negatively affected.
- Privacy: Privacy-related regulation or a major leak of consumer information leading to lower Internet
usage could have negative impact on the future revenues, earnings and stock prices of all companies in
our coverage.
- Disruptive innovation or global competition: Companies in our coverage derive the majority of their
revenues from Internet advertising (GOOG, YHOO), e-commerce and e-commerce related services
(AMZN, EBAY), and the delivery of content over the Internet (NFLX). Because of relatively low
barriers to entry, they face the risk of increased competition from a new entrant or from a established
business in an adjacent space (e.g., Google, Apple or Netflix selling books online); successful entry or
even its announcement could have a negative impact on future revenues, earnings and/or stock prices.
Google Inc
- Google is currently a party in multiple regulatory proceedings (including formal investigations by the
United States Federal Trade Commission and by the European Union). Actions by these or other
agencies seeking to regulate Google's activities could have a negative impact on the company's
revenues, earnings, and/or its stock price.
For the exclusive use of NÌLAY SHAH at ÌVORY CAPÌTAL on 12-Apr-2012
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April 12, 2012
Carlos Kirjner, Ph.D. (Senior Analyst) • carlos.kirjner@bernstein.com • +1-212-823-3237
33
- Android phone manufacturers and Google are involved in a number of law suits related to intellectual
property. Unfavorable outcomes related to these lawsuits could have a material impact on Google's
future ability to capture mobile search upside
- If Apple were to remove Google as the default browser on iOS-powered mobile devices, or charge a
large incremental amount to keep Google as the default search engine, it could have material negative
impact on revenues, earnings and the stock price.
- If consumers' online behavior or preferences were to change significantly, it could have material
impact on Google's advertising revenues and the company's performance.
- A negative reaction by other handset manufacturers who distribute the Android operating to the
acquisition and integration of MMI could limit Google's upside in mobile online advertising, including
search.
- If Google were to pursue another large acquisition or invest a large amount of resources in ventures not
directly connected or immediately adjacent to its businesses, financial and stock performance could
suffer.
Yahoo! Inc
- Yahoo! could be acquired at a premium to current valuation. Conversely, if the Board of Directors
decides it will not pursue a comprehensive or partial sale, the stock price may fall.
- Yahoo! may hire a new CEO, whose reception by the market and ability to steer the company in the
medium term may have a material impact on the stock price.
- If our assumptions on the timing and degree of competition Yahoo! will face on search and display
prove wrong, the company's performance and stock price may differ materially from our forecast.
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SRO REQUIRED DISCLOSURES
∑ References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong)
Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a
licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.
∑ Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
∑ Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the
U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian
companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside
of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless
otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
∑ As of 04/11/2012, Bernstein's ratings were distributed as follows: Outperform - 40.7% (1.6% banking clients) ; Market-Perform - 49.2%
(0.4% banking clients); Underperform - 10.2% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in
parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the
last twelve (12) months.
∑ Bernstein currently makes a market in the following companies GOOG / Google Inc, YHOO / Yahoo! Inc.
12-Month Rating History as of 04/10/2012
Ticker Rating Changes
GOOG O (IC) 11/04/11 O (DC) 01/04/10
YHOO M (IC) 11/04/11 O (DC) 01/04/10
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and
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range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are
subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this
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any time hold, increase or decrease positions in securities of any company mentioned herein.
Bernstein or its affiliates may provide investment management or other services to the pension or profit sharing plans, or employees of any
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www.bernsteinresearch.com. Additionally, Bernstein Research Publications are available through email, postal mail and commercial research
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Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors should be
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This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in investment
research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York,
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CERTIFICATIONS
∑ I/(we), Carlos Kirjner, Ph.D., Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our)
personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views in this publication.
Approved By: CDK
Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of
AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication,
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public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein.
This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax
advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of
investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not
necessarily a guide to, indicator of, or assurance of, future performance.
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