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Valuing Facebook Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. As of January 2012, Facebook has more than 800 million active users.Users must register before using the site, after which they may create a personal profile, add other users as friends, and exchange messages, including automatic notifications when they update their profile. Additionally, users may join common-interest user groups, organized by workplace, school or college, or other characteristics, and categorize their friends into lists such as "People From Work" or "Close Friends". The name of the service stems from the colloquial name for the book given to students at the start of the academic year by some university administrations in the United States to help students get to know each other. Facebook allows any users who declare themselves to be at least 13 years old to become registered users of the site. Facebook has already achieved. Its ability to enter and dominate categories is unprecedented, mainly the on-line worlds. The company was founded in 2004 with the year ending with a little over 30,000 users, mainly from college students with a valid college ID, In 2009, face book had a little over 180 Million users, in 2012 the company has over 800 Million users. Let us create a fairly optimistic scenario based on this record. Suppose that Facebook were the next Google, another US company that has radically changed its industry and taken a significant share of the online advertising markets. Say that by 2020, Facebook continues to be the leading social network company. If the company would be at 5 Billion users,which is nearly a 2/3 of the entire world population the company would have revenues exceeding 60 Billion and a profit of over 15 Billion. Weighing the Probability Uncertainty is the hardest part of valuing high-growth technology companies, and the use of probability-weighted scenarios is a simple and straightforward way to deal with it. This approach also has the advantage of making critical assumptions and interactions far more transparent than do other modeling approaches, such as Monte Carlo simulation. The use of probability-weighted scenarios requires us to repeat the process of estimating a future set of financials for a full range of scenariossome more optimistic, some less. For Facebook, we have developed four of them (Exhibit 1).

In Scenario A, Facebook becomes the largest new media company that completely changes the online advertising dynamics beating Google. It uses much less capital than companies like Google do because it is primarily new relatively a new company that has the advantage of using much cheaper software and hardware technology to build similar products. It captures much higher operating margins because it is the on-line advertising company of choice; even if its prices are comparable to those of other online advertisers, it has more purchasing clout and lower operating costs. Facebook becomes the worlds largest single point of internet user of well over 5 Billion users Private and Confidential

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Facebook is also able to increase the ARPU from $0.40 to $4.5, It is able to build and create different verticals that enable ARPU to dramatically increase

This scenario implies that Facebook given the current multiples Facebook would be worth 450 Billion in the fourth quarter of 2020. Scenario B has Facebook capturing revenues almost as large as it does in Scenario A, but its margins and need for capital fall in the range between those of the first scenario and the margins and capital requirements of a traditional advertiser. Facebook becomes one of largest single point of internet user of well over 3 Billion users Facebook is also able to increase the ARPU from $0.40 to $3.5, It is able to build and create different limited impact through verticals that able to increase a steady ARPU to increase consistently

This second scenario implies that Facebook will have a value of 150 billion as of the fourth quarter of 2020. Facebook becomes a large new media company in Scenario C, though not as large as it does in Scenario B, and the companys economics are closer to those of traditional online advertising companies like Google. Facebook becomes one of largest single point of internet user of well over 3 Billion users Facebook is also able to increase the ARPU from $0.40 to $2.5, It is able to build and create some limited impact verticals that able to help increase a steady ARPU to increase consistently

This third scenario implies a value for Facebook of $75 billion. Finally, in Scenario D, Facebook becomes a fair-sized new media/Advertising company with traditional advertising revenues and economics. On-line advertising mimics most other forms of the business, with many competitors in each field. Competition transfers most of the value of going on-line to consumers. Facebook becomes one of largest single point of internet user of well over 3 Billion users Facebook is also able to increase the ARPU from $0.40 to $1.5, It is able to build and create some limited impact through verticals that able to increase a steady ARPU to increase consistently

This scenario implies that Facebook will be worth only $36 billion. We now have four scenarios, in which the companys value ranges from$36 billion to $450 billion. Although the spread is quite large, each scenario is plausible.Now comes the critical phase of assigning probabilities and generating the resulting values for Facebook (Exhibit 2). We assign a low probability, 5 percent, to Scenario A, for though the company might achieve outrageously high returns, competition is likely to prevent this. Facebooks current lead over its competitors suggests that Scenario D too is improbable. Scenarios B and Cboth assuming attractive growth rates and reasonable returnsare therefore the most likely ones.

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Exhibit 2

When we weight the value of each scenario, depending on its probability, and add all four of these values, we end up with $300 billion, which happened to be the companys market value in the 4th quarter of 2020 It therefore appears that Facebooks market valuation can be supported by plausible forecasts and probabilities. FaceBook Profit to Equity Ratio Lets talk technical for a minute. A P/E ratio is the comparison of a companys share price to its earnings per share. Therefore, if a company was trading at $10 a share, and had profits of $1 a share, it would have a P/E ratio of ten. In normal terms, the higher the P/E ratio that a company can command (it is set by the markets will), the faster that the company is likely (as thought by the market) to grow. This brings in our next term: P/E/G, or the Price/Earnings/Growth metric. To ascertain a stocks P/ E/G ratio, simply divide the firms P/E ratio by its growth rate. If your stock that had a P/E of ten was growing at a ten percent growth rate, then it would have a P/E/G of 1. Generally speaking, this metric is used to help put a companys P/E ratio into context. If the firm has a P/E/G of over one, meaning that its P/E ratio is larger than its growth rate, that is generally considered a sign that the firm is overvalued, or is trading at too high a price for its fundamentals. A company that has a P/E/G of less than one, so that its growth rate is higher than its P/E ratio, is generally considered to be a potential value stock. This is why revenue growth matters greatly in the pricing of stocks. Well use Facebooks net profit of 1 billion dollars in 2011 as an example. Facebooks net profit rose 65.2% from 2010, to 2011, from $606 million, to $1 billion. Therefore, being overly simple, using a P/E/G of 1, Facebook would be valued at some 60 billion (To make that simpler, to get a P/E/G of one, the P/E ratio must be equal to the firms annual growth, so in this example, Facebook would have a P/E of 60 (+ range) For comparison LinkedIn has a P/E of 1,507, but Linked is not public, and to sustain a PE of 60 for any firm is not easy.. A great deal of this uncertainty is associated with the problem of identifying the winner in a large competitive field: in the world of high-tech initial public offerings, not every Internet company can become the next Apple,Google, Microsoft or Cisco Systems. History shows that a small number of
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players will win big while the vast majority will toil away amid obscurity and worthless options, and it is hard to predict which companies will prosper and which will not. Neither investors nor companies can do anything about this uncertainty, and that is why investors are always told to diversify their portfoliosand why companies dont pay cash when acquiring Internet firms. Facebook Filing and addenda from the firms S-1:

If you look at the two graphs, which are very important for Facebook, you will note a rather dull, linear rate of growth that tapers off towards the most recent entry. Is this cause for alarm, as at first blush, it seems that Facebook is slowing down? I dont think so. Primarily, there are only so many people online, total, so to see Facebook slowly have a harder time signing up the next hundred million users, and getting them integrated into its ecosystem, is not surprising; it was bound to happen. More users means more gamers buying up Facebook Credits, and more users means more page views serving up those well targeted ads, right? Of course. However, thats not the full picture. Facebook has been growing like the proverbial garden pest for so long that to grow its revenues, the company has had to do little more than sign up users, and let advertisers market to them. The company can do more. Averaging its 2011 numbers, Facebook had some 766 million active monthly users. It generated $3,711 billion dollars in revenue off of that, so we can take the metric to be that for every monthly active user that the company averages for a year, it makes about $4.80 in revenue. Break that into monthly quantities, and Facebook generates about forty cents in revenue per active user per month. This fact is why I dont think that Facebooks revenue growth potential is anything less than enormous: if it is only monetizing its average, active user at forty cents per month, there is a simply huge amount of money being left on the table. Thats about one clicked ad, per user, per month. Think about the number of pageviews that the average users runs up in a month. Surely Facebook can improve on that ad rate. If it gets half its users to click on 50% more ads, Facebook just massively moved its needle. Therefore, I think that the efficacy of Facebooks ad platform is what can be improved, and that coupled with continued user growth spells the real potential for greatly higher ARPU, and therefore, growth, and therefore, a comfortably expanding market value. Thats not even the whole of what I could say here, Facebook could add greatly to its revenues in the following ways: 1 Expand its partnership with Bing, running full, complete results inside of Facebook. Then take a fat share of the ad revenue, just as Mozilla does with Google. Make this prevalent, and there is hundreds of millions of dollars in revenue to be made.

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Expand the ability for users to listen to and watch content inside of Facebook, using tools that third-party companies build, charge the companies for the access, all the while keeping users even more glued to Facebook, generating more ad revenues.

I could go on, but you get the point. Heres the gist of my argument: by just focusing on Facebooks current ARPU (average revenue per user), and looking at its user growth rates, it is very easy to underestimate the potential of Facebook to generate revenues and profits. Now, Facebook may bite the dog and fail to capitalize on what is in front of them, but to say that they are in a box that they cant grow out of is at best short-sighted. Facebooks $5 billion S-1 IPO filing includes a detailed assessment of business risks. These include: its lack of mobile monetization and the fact that it doesnt own a mobile platform, government censorship and privacy scrutiny, inability to maintain its growth rate, and competition from Google+ as well as Twitter and Microsoft. Heres a closer look at these risks, followed by the full text of the risk summary, and you can see the whole Risk Factors section starting on page 10 of the S-1 filing to the SEC. Growth and Engagement Facebook explains its biggest challenge may be that: Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. As weve written about, Facebook has saturated some of its key first-world markets in terms of user count.Some specific threats to its growth and engagement include competing products, failure to introduce well-received new products, inability to balance the user experience with the presence of ads, content relevancy, reduced perception of the services usefulness, and concerns about sharing, safety, and security. Mobile Facebook admits: We do not currently directly generate any meaningful revenue from the use of Facebook mobile products. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computersour revenue and financial results may be negatively affected. Simply put, Facebooks mobile site and apps do not show ad sidebars, or ads of any kind. Many suspect Facebook will soon start serving Sponsored Story ads in the mobile news feed, but it will have to limit their presence to not offend users. In regards to its lack of a mobile device or OS, Facebook states: We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices. Googles Android could give preference to Google+ and iOS already uses Twitter as its identity provider and native sharing option. Google and Apple could effectively box Facebook out of mobile if it doesnt secure stronger relationships with them.

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Additionally, Google and Apple control the native in-app payments systems on their mobile operating systems, preventing Facebook from earning its 30% tax on in-app purchases. Facebook has launched an HTML5 mobile app platform but it has failed to gain significant traction. Facebook may need to develop its own mobile OS or wait until HTML5 becomes more powerful, and by then it could be too late to catch up to Apple and Googles mobile app platforms. Competition Facebook says competitors are attacking from all directions, stating: We face significant competition in almost every aspect of our business, including from companies such as Google, Microsoft, and Twitter, which offer a variety of Internet products, services, content, and online advertising offerings, as well as from mobile companies and smaller Internet companies that offer products and services that may compete with specific Facebook features. We also face competition from traditional and online media businesses for advertising budgets. This is one area where Facebooks risk may not be as bad as it sounds. As Ive detailed, the network effect of its interconnected user base protects it from disruption by similar services. Facebook has also been acquiring disruptive startups and talent. Through recent product launches like its asymmetrical Subcribe feature, Facebook has reduced Twitters threat. Still, Google has enormous cash reserves and web presence to throw into the war with Facebook. Google knows identity as a layer that ties together activity on its various products is crucial to the future of its ad targeting business. Google+ may never have the worlds most popular news feed, but its ability to serve highly-targeted ads based on personal data and Google product usage could fracture social advertising demand. Government Censorship and Privacy Regulation Regarding the possibility of government censorship, Facebook notes: It is possible that governments of one or more countries may seek to censor content available on Facebook in their country, restrict access to Facebook from their country entirely, or impose other restrictions that may affect the accessibility of Facebook in their country for an extended period of time or indefinitely. For example, access to Facebook has been or is currently restricted in whole or in part in China, Iran, North Korea, and Syria. Facebooks censorship in China is possibly the biggest barrier to its sustained growth. If it could gain entry there, it would quickly surge past 1 billion users. If more countries shut it out, it will have to squeeze a higher average revenue per user from its existing base. Facebooks needs to build a crack team of international policy specialists and lobbyists to make sure theres still a supply of fresh users to sign up. Beyond censorship, Facebook is also subject to regulation: Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business. Facebook recently settled with US Federal Trade Commission and survived an audit from the European Unions Office of the Irish Data Protection Commissioner. Through smart compromises and negotiations, it managed to avoid and dire consequences for its business, but it might not be so lucky next time. Strong domestic and foreign lobbying presences will be necessary to avoid heavy scrutiny. Most importantly, Facebook needs to carefully consider any change or
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product launch that influences privacy to avoid stumbles like Beacon, the transition of interests into public Likes, and the opt out launch of facial recognition. Additional risk factors include that Zynga makes up 12% of Facebooks revenue, the companys dedication to user engagement over short-term financial results, privacy and security leaks, patent lawsuits, and hacker attacks. Full Text of the Summary Risk Factors: Our business is subject to numerous risks described in the section entitled Risk Factors and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include: If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed; We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business; Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results; Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control; We may not be successful in our efforts to grow and further monetize the Facebook Platform; Our business is highly competitive, and competition presents an ongoing threat to the success of our business; Improper access to or disclosure of our users information could harm our reputation and adversely affect our business; Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could harm our business; Our CEO has control over key decision making as a result of his control of a majority of our voting stock; The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business; We anticipate that we will expend substantial funds in connection with tax withholding and remittance obligations related to the initial settlement of our restricted stock units (RSUs) approximately six months following our initial public offering; The market price of our Class A common stock may be volatile or may decline, and you may not be able to resell your shares at or above the initial public offering price; and Substantial blocks of our total outstanding shares may be sold into the market as lock-up periods end, as further described in Shares Eligible for Future Sale. If there are
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substantial sales of shares of our common stock, the price of our Class A common stock could decline. References : TechCrunch, SEC, Facebook, Wikipedia and the next web Disclaimer This document and the contents of it do not, and are not intended to, constitute an offer for sale or an invitation to treat offers to purchase any company, its shares, other securities or assets. For the avoidance of doubt there is no intention to create a legal relationship and such relationship will not come into existence unless and until a formal written contract, approved by respective solicitors, has been entered into. The information herein has been provided to Intensive by the Groups management. All enquirers or prospective purchasers must carry out their own due diligence in respect of the matters referred to and satisfy themselves as to the accuracy of all matters. Whilst every care is taken in the preparation of this document and the information contained in it, we hereby give you notice that we cannot and do not accept any responsibility and/or liability for any loss or damage of whatsoever nature that may occur by reliance on it and howsoever arising. Any disputes or claim arising under or in connection with this document shall be subject to the non-exclusive jurisdictions of Pune, India. The above document is only an independent opinion and should be treated as such.

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