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May 23, 2012

Laura Martin, CFA lmartin@needhamco.com 917-373-3066 Kerry Rice krice@needhamco.com 415-262-4890 Dan Medina dmedina@needhamco.com

Internet, Entertainment & Consumer

Facebook Inc. (FB) Buy FB: Initiating Coverage with a Buy and $40 TP
We initiate coverage of Facebook (FB) with a BUY rating and $40 target price. With over 900mm monthly unique users, we believe FB is an option on the World. The best question for FB is how to value it. Our point of view is that FB should be valued based on revenue potential from total minutes spent on FB times its powerful margin expansion engine. 1. Consumer adoption. We believe that the potential to generate revenue is limited by consumer demand for your product online. Monthly users are the best proxy for consumer acceptance, since consumer substitution is easy online. FB has about 900mm monthly users after 8 years in existence, about 90% of Googles 1 billion monthly users after 14 years. Time Spent. We believe that money follows time. FB represents approximately 14% of time spent online globally (comScore), suggesting that its revenue potential is $14B globally and $6B from the US alone, calculated as 14% of Zeniths global internet revenue estimate of $98B and eMarketers US internet estimate of $46B in 2013. Margin Expansion. The operating margins at FB are enormous and expanding, at 33.7% in 2009, 52.3% in 2010, and 47.3% in 2011. This powerful economic engine suggests profit growth will be faster than revenue growth. Execution. FB has already solved the two hardest execution risks onlinediscovery and relevance. The biggest execution risk that remains is monetization. Advertising, payments, social graph services since we believe that money follows time, we also believe the FB platform offers several ways to solve the monetization puzzle. We completed a proprietary survey of FB users that highlighted several monetization opportunities. Global Scale: FBs global platform with long engagement times gives it a unique strategic position to generate revenue from global advertisers, payments, services, etc. It also represents a meaningful barrier to entry.

Coverage Initiation
Market Data Price (05/22/12) 12-Month Price Target 52-Week range Shares Out. (MM) Market cap (MM) Avg. daily volume (000) Financial Data Total Debt/Cap. Price/LT M Rev. Tangible BVPS Net Cash Per Share $31.00 $40.00 $38.23-31.00 2,750.0 $85,250.0 283,650.4 0.0% $3.55 $2.57

2.

3.

4.

5.

FY 12/31/11 A Old Rev. (M M) Growth Op. Mar. EPS: 1Q EPS: 2Q EPS: 3Q EPS: 4Q EPS: Year Growth P/E Ratio $3,711.0 88.0% 47.3% 0.0%

FY 12/31/12 E New $5,041.1 35.8% 39.0% 0.09A 0.11 0.12 0.15 0.48 12.1% 64.3x

Old 0.0%

FY 12/31/13 E New $6,525.6 29.4% 40.0% 0.13 0.14 0.15 0.17 0.60 23.4% 52.1x

Facebook Inc. Price

05/22/12
39 38 37 36 35 34 33 32 31

May

Volume (000)
600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 May

0.43 53.6% 0.0x

0.0% nm

0.0% nm

Source: Company data, Needham and Company estimates. Note: Pro forma earnings estimates displayed above do not include one-time items or any stock compensation expenses.

Disclosures applicable to this security: B, G. Disclosure explanation on the inside back cover of this report.

MORE THOUGHTS ON VALUATION We think of FB as a global consumer-facing ad-driven platform and that therefore the most comparable predecessors to FB were Google and Yahoo! Since the Internet environment has changed rapidly, we think Google is a more relevant predecessor in many respects. Our comparative valuation thoughts include: 1. Relative Risk. At its IPO date, GOOG was valued at about 17x revenue and FB is valued at about 19x revenue. We believe that this premium is deserved because the risk an investor takes in buying FB is lower than Googles at its IPO date. Purchasers of the Google IPO took both consumer-adoption risk and dollars per user risk. Google reported $1.5B of revenue in 2003, the year before it came public, and it only had 60mm users at its IPO date. By contrast, FB reported $3.7B of 2011 revenue (before it came public) and it has virtually NO consumer-adoption risk as it is in 90% of the households that Google is today. An investor buying FB has the narrower risk of dollars per user. 2. Money Follows Time. How big could FBs revenue be? We believe that FB should have higher revenue than Google over time because the number of users are about the same but the average time spent on the Facebook site is 14 mins per day, which is nearly 3x Google.coms 5 minutes spent per person per day. In terms of value, investors are buying FB at half the valuation of Google, but getting 3x the minutes spent. In fact, the single Facebook.com site accounted for 14.6% of all time spent online, while all Google Sites (including YouTube) were second at 10.8%, and all Yahoo! Sites were third at 8.6%. (Source: comScore, December 2011) 3. Monetization Upside. We believe Google search does an excellent job at the bottom of the purchase funnel for advertisers. We think GOOG has brought genius to the equation of linking consumer purchase intent to advertising and commerce. We do not believe this is an area that will be unseated by FB. We are more optimistic about FB payments and revenue-sharing from access to its platform over time and from services that use the social graph that only Facebook has. In answer to questions we posed in a proprietary survey of Facebook users, respondents mentioned that they valued recommendations by their friends more than strangers. Only FB knows who their friends are, which suggests revenue upside over time (for details of our FB survey, please see Appendix A). 4. Platform Optionality. We would underscore the huge consumer value being created each day by the FB platform on a global basis, as evidenced by 900mm people using FB an average of 14 minutes per day, accounting for 14% of all time spent on-line and 16% of all page views (comScore), The FB platform has established its value to consumers. The primary remaining execution risk is how to best monetize that value without negatively impacting consumer usage. 5. Margin Engine. FB is a fixed-cost business with low marginal costs for each new revenue dollar. By implication, FBs earnings growth should be faster than its revenue growth. FBs margins are significantly higher than Googles in its first five years of existence (the same phase of growth), as illustrated by Figure 1 below.

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Figure 1*
60% 42% 52%

FB

47%

Op Inc/Revenue

13%

34%

23%

GOOG

20%

-20%

Margin Expansion Track Record

-77% -85% -81%

Year 1

Year 2

Year 3

Year 4

Year 5

*Year 1 for GOOG is 2000. Year 1 for FB is 2007. Sources: Google and Facebook filed documents.

6. Management Track Record. Employees in the Silicon Valley are mobile and move to the company that has the smartest people, the best culture, and a strong likelihood of an IPO in the near future. FB has had its pick of the litter for the past several years. FBs 3,539 employees are among the best at each job they do. We believe this collection of the best and brightest will figure out how to create revenue from 900mm people spending 14 mins/day on the FB platform. 7. Large Cap Growth Stocks Are Rare. With US GDP growing 2% and Europe lower, growth is difficult to find, and large cap growth stocks are even more rare. We estimate that FB will grow revenue by 36% in 2012, by 29% in 2013. FB has grown subs by 50-60mm per quarter like clockwork for the past 12 quarters. 8. Alpha. FB will not be in any index in the near term, which creates opportunity for alpha. For example, between Googles IPO date on 8/19/2004 and the date GOOG entered the S&P index on 3/31/2006, Google rose 359% compared with the S&P500 increase of 19%, representing significant alpha created by GOOG, and suggesting potential alpha upside for FB.

An Investment Analysis by Needham & Company, LLC 3

INTRODUCTION This report is laid out in the following order: 1) Investment Positives; 2) Risks to our Target Price, 3) Earnings Estimates; 4) Detailed Valuation Discussion; and 5) Company Description. Appendix A includes a summary of the results of our proprietary survey. Since everyone knows what Facebook does, we have moved the company description to the back of this report, so as not to bury the lead. INVESTMENT POSITIVES 1. Global Scale creates a virtuous cycle and competitive advantage for FB. Facebook is the largest social network, with 901 million users, representing about 40% of global Internet users and 90% of Googles 1B monthly users. Additionally, FB reported 526 million daily active users in March 2012, an increase of 41% y/y. The large and rapidly growing user base attracts advertisers and retailers and creates meaningful upside revenue optionality for the FB platform. 2. Platform Value. FBs platform provides connective tissue to expand social experience, unlocking innovation, and maximize pricing power. FB has created a walled-garden platform (similar to Apple APPL, Buy). FB controls access to its users and all data posted on the site. It also requires apps to be developed solely for Facebook. This allows FB to control, standardize and maximize the user experience. FB provides a consistent suite of APIs that enables any software developer to interact with Facebook, which we believe unlocks innovation. The companys walled garden approach also prevents the site from being indexed by Google (GOOG, Buy) or any other third party. This means that FB has advertising inventory that is differentiated from the rest of the Internet, maximizing its pricing power. 3. Engagement Is Valuable. We believe two groups within Facebook, fans and friends of fans, are critical drivers of value for FB. A member becomes a fan, when they like content and friends of fans are a members social graph. Facebook revealed that members generated an average of 3.2 billion Likes and Comments per day during 1Q12. Additionally, members generate 100 million Likes for brands every day. A Webtrends study revealed that the average click through on ads to fans and friends of fans were 7x and 4x the click through for non-fans, respectively. Armed with this insight, Facebook launched its Expanded Premium Ad, which highlights a friends Like with an accompanied picture of the friend. Using this strategy, users were twice as likely to remember this ad and were more likely to share the ad compared to typical display ads. Additionally, the intent to purchase increased 4x. Implications? Sellers and advertisers can engage with consumers worldwide at scale. Friending establishes an authentic and ongoing connection between consumers and brands. These interactions build social capital for brands because consumers trust recommendations from friends and their social graph. Additionally, our research shows that engagement is a better predictor of monetary upside than unique visitors. 4. Personalization enhances relevance which increases engagement and drives revenue growth. Beyond liking or following a brand, we believe personalization is a key driver of value. We believe a key competitive advantage of Facebook is personalization owing to the vast amount of personal data revealed by consumers, social context, and relevance. We believe personalization creates value in two ways for consumers:
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First, the organization and prioritization of content serves as a tool for consumers to discover and consume content specific to their interests. Second, personalization enables Facebook to provide a platform for the creation of new products that enable customized users experiences, such as Pandora (P, BUY), which enables customized radio stations. Over time, we believe FB has the potential to anticipate consumers intent. Understanding intent would enable advertisers and online retailers to personalize offerings, which would improve return on investment. 5. FB as Power Seller. We believe that FBs power to sell products is more powerful than the visible revenue streams it is generating today. In an April 2, 2012 study published by Sociablelabs, 62% of the 1088 consumers it studied had checked out a product posted by one of their friends on FB. Of those, 75% of the shoppers who read about the product clicked on the link that took them to an external pointof-purchase or brands website and 53% of those consumers PURCHASED something. This suggests that about 20% of consumers that saw an ad on Facebook posted by a brand ambassador actually bought something. This study also calculated peoples trust in advertising on social media. 48% of consumers studied found Facebook very helpful in searching for products to buy. Figure 2*
Conversion Type Appl Install Contest Submission Contest Voting Fan Acquisition Program Sign-up Purchase Sweepstakes Entry Total Fan Non-Fan Conversion Conversion Rate Rate 38% 12% 6% 1% 31% 5% 29% 19% 2% 1% 7% 2% 39% 17% 19% 7%

*This study included 5 million Facebook ads placed by 50 clients. Source: SocialCode study, Needham & Company, LLC.

6. ARPU Momentum. ARPU increased 32% from $3.08 in 2009 to $4.08 in 2010 and 25% to $5.11 in 2011, with ARPU growth across all regions of FBs footprint. 7. International Growth. Despite Facebooks enormous global scale, penetration in large geographies such as Russia, South Korea, and Japan is still below 20%, which suggests user and revenue growth opportunities for many years to come. 8. Mobile adoption should be an engine for Facebook user growth and engagement for many years to come. We believe the billions of mobile devices enable consumers to remain connected regardless of location or time. More than 50% of FBs monthly active users (representing 488 mm users) accessed Facebook with mobile devices in March of 2012. In the US alone, comScore reported that users spent 391 minutes accessing FB on the PC plus 441 minutes accessing FB on smartphones in March of 2012. Rapidly growing mobile usage has been a key driver of Facebooks daily active user growth. Over the past 6 months alone, FBs mobile users have grown 39% (350mm in September 2011 to 488mm in March 2012). We believe mobile access is largely additive rather than cannibalistic because FBs mobile usage has not slowed its strong growth in unique visitors to
An Investment Analysis by Needham & Company, LLC 5

its PC-based website, which increased 33% y/y in March 2012. Notably, the Facebook app is the most downloaded app across all mobile platforms. 9. Advertiser Adoption. Speaking with many ad agency executives during the digital NewFronts and the Broadcast TV upfronts, most suggested that they will spend more money on FB in 2012 than they did in 2011, and that they expect to spend even more in 2013 vs 2012. 10. Barriers to Entry. FB benefits from network effects, which implies a virtuous cycle. The more people that are on FB, the more valuable it becomes. We believe the scale of FBs network represents a significant competitive advantage and a significant barrier to entry. Consumers find it difficult to maintain multiple profiles on other platforms. 11. Potential Revenue Upside. We believe that the right way to think about FB is as a platform with revenue upside over a global footprint. In our proprietary survey, we asked FB users about what they liked and didnt want in terms of monetizing the FB platform. Those ideas are included in the section below. Payments. We are optimistic about the payments business for FB. We believe that developers will innovate to create value from FBs enormous global reach (just as Zynga has) and that FB will share in these revenue streams through Facebook credits. We envision a world where PayPal loses a portion of its revenue and credit card companies lose a portion of their fees to Facebook credits over time. Advertising. Advertisers can have home pages, apps and/or buy advertising on FB to try to engage with all of FBs 900 million monthly active users or just subsets based on information users have chosen to share about their age, location, gender, or interests. FB delivers to advertisers reach, relevance, social context, and engagement. Together, this combination holds out the promise of higher effectiveness than traditional choices. Branded Advertisers. 35% of total direct response advertising has moved online, compared with only 6% of branded advertising. One of the key gating factors for brands is that they must have a safe environment. That is, they dont want their ad to show up next to inappropriate content. FB is a closed platform, so it has control over what type of content a branded advertisers ad shows up next to. We note that 100% of the top 100 brands have FB relationships in some form and that branded advertising dollars approach $90 billion annually. We believe that FBs global platform will successfully move these reluctant brand dollars online. E-commerce. Certain online retailers allow consumers to identify the products or services that interest them by tagging them. According to an ATG survey, in the online world, women most often care about recommendations and 78% of women in the U.S. use the Internet for product information before making a purchase. Twice as many women as men said they frequently share purchasing activities on Facebook and Twitter. This bodes well for FBs unique strategic position between purchase intent and actual purchase. Video Upside. The TV ecosystem reports approximately $150B of revenue annually. We attended the Digital NewFronts in NYC in April and were struck by the enormous growth of original scripted premium video that is being produced in Hollywood, directly for the Internet. AOL (AOL, Buy) announced 14 new premium content channels and YHOO announced 3 new premium content slates (women, men and comedy).
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Although YouTube continues to dominate video viewing on the Internet, Hulu is the dominant premium video site and out-monetizes YouTube. We believe that premium video delivered over the FB platform represents a tremendous untapped upside revenue potential for FB. 12. Centrality of FB to Women Women Drive Economics. Globally, women control 70% of purchases. In the US, women control or influence 85% of total consumer purchases. (Please see our report entitled The Economics of Women on the Web dated March 5, 2011.) Women are most likely to be found on social networking sites and apps such as Facebook (57%), Pinterest (80% women), MySpace (64%), Twitter (57%), and Flickr (55%). In the U.S., women are more likely to sign up for social networks, and they use them more. Social networking reaches 91% of American women online, compared to 88% of men. (comScore) This distinction expands when we look at usage. The average female posts between 10 and 26 times a month on average, while males post between 7 and 17 times. Globally, its hard to argue with the dominance of Facebook among women. With 57% female users, it attracts about 46 million more female visitors than male visitors each month. And women have larger social networks, with 8% more friends than men. Finally, women participate in 62% of all sharing, one of the key goals of any social site. (Source: Facebook, 2009) Moms. Todays moms are more isolated today than in the past. Only 19% of moms today raise their child in the community where they grew up. To offset this isolation, 90% of moms use Facebook, 60% Tweet, and 60% read or contribute to blogs, according to Mom Central Consulting study in 2Q11. After putting the kids to sleep, moms share their day on FB with their friends, ask for advice, play games and meet their me time needs. 90% of mothers go to FB and other social networks for me time. Facebook is the primary online site that women visit to interact with friends, mentors, advisors, and coaches. Online venues like Facebook and Twitter meet a womans social interaction needs and adult conversation needs, according to Lipstick Economy. Singles. FB is redefining how relationships are managed. 50% of women believe that its fine to date people theyve met on Facebook, compared to 65% of men. 20% of men us FB to hook up and 6% of women say they use it to hook up 49% of women believe its fine to keep tabs on a boyfriend by having access to his accounts and 42% of men think its fine to keep tabs on a girlfriend by having access to her FB account. 24% of men and 9% of women have broken up a relationship using Facebook. (Source: Oxygen Media/Lightspeed study, June 2010,) Young Women. Generationally, social networks are becoming more entrenched in young womens lives over time. According to a study of young women, aged 18-34, by Oxygen Media and Lightspeed: 57% say they talk to people online more than face-to-face. 21% check Facebook in the middle of the night. 33% check Facebook when they first wake up, even before they walk to the bathroom. 39% state they are Facebook addicts. 63% use Facebook as a networking tool. 58% use Facebook to keep tabs on frenemies.
An Investment Analysis by Needham & Company, LLC 7

RISKS TO OUR TARGET PRICE 1. Fatigue Factor. About 30% of the respondents in our proprietary survey said they were using FB less than one year ago. Is there a FB lifecycle? 2. Privacy Issues. How FB uses its users data has come under close scrutiny. The rising sensitivity around privacy could threaten FBs revenue upside. 57% of FB users are women and women are far more private than men. An Oxygen Media/Lightspeed survey from July 2010 highlighted several FB privacy issues with women users including the statistic that 54% of 18-24 year old women said that they did not trust Facebook with their private information, and 89% agreed that you should never put anything on Facebook that you dont want your parents to see. 3. Advertising Seasonality. We note the seasonal slowdown of Facebooks 1Q12 revenue. For 1Q12, revenue was $1.06 billion, down slightly from $1.13 billion in 4Q11. Typically, advertising spending is strongest in Q4 and weakest in Q1 but it surprises us that FB would be subject to typical seasonality of the advertising market given its early stage of growth. Similarly, average revenue per user growth (ARPU) declined to $1.21 in 1Q12 from $1.38 4Q11. We believe the decline in ARPU was related to faster monthly active user growth in geographies with lower ARPUs, such as Asia and Rest of the World geographies, as well as rapid growth in mobile adoption (which monetizes at a lower rate). 4. Mobile. There has been a rapid shift from Facebooks website to mobile. Historically, Facebook has not shown ads to users accessing FB through mobile apps or its mobile website. Not only is Facebooks ability to deliver ads to its mobile users a risk, in our view, there is uncertainty as to whether Facebook can monetize these ads at the same level as on the desktop over time. We note that management has stated that improving Facebooks mobile experience is a top priority. To that end, FB redesigned its mobile app, which expands the size of the photos and integrated its like and comment buttons into a like bar to ease use with a single click. Additionally, FB acquired top photo share app, Instagram, for $1B as well as Lightbox, a London-based mobile phone photo sharing service which develops innovative mobile products. 5. Measurement. Lack of standard measurement could slow the shift of advertising towards Facebook. A February 2012 survey of 329 senior executives in North America by management and digital consulting firm PulsePoint Group and the Economist Intelligence Unit found that the majority of companies that had invested in social media reported a positive impact on sales. However, about 50% of these executives stated that the lack of a standardized metric was a significant obstacle to determining a return on investment on social media campaigns. This difficulty was underscored by General Motors recent decision to stop spending $10 million in advertising on Facebook. 6. Zynga. A shift away from Facebook by Zynga (ZNGA, HOLD) could be detrimental to FBs revenue growth. Zynga represents approximately 12% of FBs revenue. Currently, FB generates revenue by retaining up to 30% of the face value of user purchases in Zyngas games on the Facebook plus advertising revenue. This agreement expires in May 2015, at which time Zynga could negotiate a lower fee percentage with Facebook. Alternatively, Zynga could shift it users from the Facebook platform to its own platform, which could lower both fee and advertising revenue for FB.

8 An Investment Analysis by Needham & Company, LLC

7. The Dark Side. FB is a consumer-facing business with hundreds of millions of users. By implication, FB is subject to the full range of human emotions and foibles. Mean Girls. Bullying and bragging. Folks occasionally use FB to bully others with disastrous results- these tragedies end up in the press as a cautionary tale. Alternatively, users brag about their lives which makes other users jealous and encourages them to use FB less. Body Image & Eating Disorders. A March 2012 study from the Center for Eating Disorders at Sheppard Pratt in Maryland surveyed 600 Facebook users, ages 16 to 40. More than half said that FB makes them more selfconscious about their bodies and weight. 75% of women (vs 58% of men) admitted they'd like to lose some weight. 40% of men (vs 20% of women) said they've posted negative comments about their bodies. From the study: "Facebook is an influential factor in developing severe eating disorders. When you're unhappy with the way you look, it's easy to avoid mirrors, but it's tough to go without Facebook. Eighty percent of those surveyed log onto Facebook at least once a day. It's impossible to avoid seeing photos of yourself and your friends. But we're not just looking we're comparing. With FBs new profile format, with a single a click you can see what you looked like five years ago, and the comparison can be depressing. Nearly 35% of people felt "sad" when comparing photos of themselves and their friends, and 44% wished they had the same body or weight as a friend on Facebook. Narcissists. a. A 1Q12 study from Western Illinois University showed a link between the number of Facebook friends users have plus how active they are on FB to the likelihood of being a socially disruptive narcissist. In a study published in the March 2012 journal entitled Personality and Individual Differences, among the 300 participants who took a Narcissistic Personality Inventory questionnaire, those with more Facebook friends, who tagged themselves in photos and updated their status throughout the day were more likely to have narcissistic traits. Facebook gives narcissists the opportunity to exploit the site to get the feedback they need and become the center of attention states study author Chris Carpenter. b. In 2010, a study published by York University in Canada asked 100 students, 50 male and 50 female, aged between 18 and 25 about their Facebook habits. Those who scored higher on the narcissism test checked their Facebook pages more often each day than those who did not. Interestingly, men promoted themselves by written posts on their Facebook page while women tended to carefully select the pictures in their profile. 8. Patents & Litigation Expenses. FB is the subject of a patent suit by YHOO. In response, FB countersued YHOO and then purchased 615 patents from MSFT (which MSFT had bought from AOL the prior week) for approximately $550mm. We believe that patent lawsuits will accelerate in the Internet space over the next 12 months, and FB could be a prime target owing to its large size and potential damages upside. (Please see our report entitled Patent Wars: War Zone Economics dated April 16, 2012) 9. Video Strategy Not Ready for Prime Time. We believe that FBs platform should be a natural haven for premium video content and views. However, in the first quarter of 2012, FBs unique video viewers fell 8% y/y in the US to 45.1mm, according to comScore. Ironically, this decline is the opposite of third-party video
An Investment Analysis by Needham & Company, LLC 9

sites where traffic is accelerating owing to FBs Open Graph integration. YouTube video views rose 2% and YHOO views rose 8% over the same time period. EARNINGS ESTIMATES In the following Table 1, we introduce our quarterly for FY12 and our annual estimates for FY13. Table 1
FYE Dec 31: Net Rev Cur ($mm) Previous ($mm) Consensus EPS Operating Previous ($mm) Consensus P/E 2Q12E $1,207 $1,180 $0.11 $0.13 3Q12E $1,287 $1,250 $0.12 $0.13 4Q12E $1,489 NA $0.15 NA 2012E $5,041 $4,960 $0.48 $0.52 64.5 2013E $6,526 $6,460 $0.60 $0.66 52.3

Sources: Needham & Company estimates, Yahoo Finance

10 An Investment Analysis by Needham & Company, LLC

Table 2 Facebook, Inc: Quarterly Income Statement Projections, 2012E


in millions, except per share data

3/31/12A 6/30/12E 9/30/12E 12/31/12E Revenue Advertising Payments and Other Fees Total Revenue Cost and Expenses Cost of Revenue Marketing and Sales Research and Development General and Administrative Total Costs and Expenses Income from Operations Operating Margin Other Expense, net Interest Expenses, net Other Income (Expense), net Income before Provision for Income Taxes Provision for Income Taxes Net Income Net Income Attributable to Participating Securities Net Income Attributable to Cl A and B Shareholders Add Back 1 Time Items $872 $186 $1,058 $993 $214 $1,207 $1,021 $265 $1,287 $1,179 $310 $1,489

2012E $4,065 $976 $5,041 Q1 37% 98% 45%

Year/Year Change
Q2 28% 80% 35% Q3 28% 70% 35% Q4 25% 65% 32% 2012E 29% 75% 36%

($277) ($159) ($153) ($88) ($677) $381 36% ($13) $14 $382 ($177) $205 $68 $137 $0 $137 $0.09 $0.09 1,522 $381 $110 $103 $594 56.2%

($296) ($169) ($169) ($97) ($731) $477 40% $5 ($965) ($483) $174 ($309) $0 ($309) $618 $308 ($0.11) $0.11 2,747 $477 $125 $100 $702 58.1%

($322) ($174) ($193) ($116) ($804) $482 38% $5 $10 $497 ($179) $318 $0 $318 $0 $318 $0.12 $0.12 2,747 $482 $135 $100 $717 55.8%

($335) ($194) ($208) ($127) ($864) $625 42% $5 $10 $640 ($227) $413 $0 $413 $0 $413 $0.15 $0.15 2,747 $625 $145 $100 $870 58.5%

($1,230) ($695) ($724) ($426) ($3,075) $1,966 39% $2 ($931) $1,037 ($410) $627 $68 $559 $618 $1,177 $0.23 $0.48 2,441 $1,966 $515 $403 $2,884 57.2%

66% 134% 169% 72% 97% -2%

41% 64% 71% 27% 50% 17%

36% 40% 79% 61% 49% 17%

36% 47% 68% 58% 48% 14%

43% 63% 87% 53% 57% 12%

-230% -4% -12% -10%

-133% -223% -231% -304%

-129% 25% 34% 106%

-125% 21% 30% 77%

-105% -39% -37% -16%

PF Net Income
EPS, Reported EPS, Pro Forma Diluted Shares Out. Calculation of OIBDA: Operating Income Depn & Amort Stock Compensation OIBDA OIBDA Margin, Net
Sources: Company Reports, Needham & Company estimates.

-18% 9% -2% 116% 1371% 33%

-209% 87% 17% 38% 43% 24%

11% 87% 17% 49% 43% 25%

-5% 87% 14% 60% 43% 23%

-50% 68% 12% 59% 86% 26%

User Metrics Monthly Active Users (MAU) Total Monthly Active Users % growth y/y % growth q/q Revenue/MAU Advertising Payments and Other Fees Total Revenue per MAU % growth y/y % growth q/q

901 32.4% 6.6%

940 27.2% 4.4%

970 21.3% 3.2%

1,000 18.3% 3.1%

1,000 18.3% 3.1%

$0.99 $0.22 $1.21 6.1% -12.3%

$1.03 $0.22 $1.25 -0.8% 3.3%

$1.07 $0.27 $1.34 8.1% 7.2%

$1.13 $0.32 $1.45 5.1% 8.2%

$4.07 $0.98 $5.04 14.8%

An Investment Analysis by Needham & Company, LLC 11

Table 3 Facebook, Inc: Segment Annual Financial Information, 2010A-2013E


$ and shares in millions, except per share data

FYE 12/31: Revenue Advertising Payments and Other Fees Total Revenue Cost and Expenses Cost of Revenue Marketing and Sales Research and Development General and Administrative Total Costs and Expenses Income from Operations Operating Margin Other Expense, net Interest Expenses Other Income (Expense), net Income before Provision for Income Taxes Provision for Income Taxes Net Income Net Income Attributable to Participating Securities Net Income Attributable to Cl A and B Shareholders EPS, Reported EPS, Operating Diluted Shares Out. Calculation of OIBDA: Income from Operations Depn & Amort Stock Compensation OIBDA OIBDA Margin, Net Sources: Company Reports, Needham & Company estimates.

2010A $1,869 $105 $1,974 ($493) ($184) ($144) ($121) ($942) $1,032 52% ($22) ($2) $1,008 ($402) $606 $234 $372 $0.28 $0.28 1,329 $1,032 $139 $20 $1,191 60%

2011A $3,154 $557 $3,711 ($860) ($427) ($388) ($279) ($1,954) $1,757 47% ($42) ($19) $1,696 ($695) $1,000 $332 $668 $0.46 $0.43 1,452 $1,757 $323 $217 $2,297 62%

Annual 2012E $4,065 $976 $5,041 ($1,230) ($695) ($724) ($426) ($3,075) $1,966 39% $2 ($931) $1,037 ($410) $627 $68 $559 $0.23 $0.48 2,441 $1,966 $515 $403 $2,884 57%

2013E $5,160 $1,366 $6,526 ($1,566) ($914) ($914) ($522) ($3,915) $2,610 40% $20 $0 $2,630 ($994) $1,637 $0 $1,637 $0.60 $0.60 2,750 $2,610 $530 $600 $3,740 57%

'10-'13 CAGR

40% 135% 49% 47% 71% 85% 63% 61% 36%

38% 35% 39% -100% 64% 29% 29% 38% 36% 56% 211% 28%

12-MONTH TARGET PRICE OF $40 Our target price of $40 is based on a DCF valuation. We use a WACC of 10.9% and a long-term nominal GDP growth rate of 1%. The standard DCF is widely used on Wall Street because it is a rigorous bottom-up valuation of the enterprise based on discounting its long-term cash flows and removing the impact of non-cash accounting conventions. Positives and negatives of this valuation methodology are highlighted beside the calculation in Table 4. Our $40 target price embeds a 10-year EBITDA growth rate of 27.6% annually beginning in 2013 and represents a 30.4x multiple of forward year (2013E) OIBDA. DETAILED VALUATION DISCUSSION Internet Precedents Is FB the first consumer-facing global internet platform? No. We would suggest that there were at least 3 predecessor internet platforms. AOL was predominantly a US platform, and therefore the least comparable to FB. YHOO and Google were both predecessor global Internet platforms. An analysis of how the market cap for each of
12 An Investment Analysis by Needham & Company, LLC

these grew as a multiple of users is a helpful analysis for valuing FB, in our view. In every case, users lead revenue and market cap growth followed. Therefore, we believe that users are the most helpful lead indicator to future valuation at the earliest stages of a global Internet platforms lifecycle. AOL Figure 3 shows AOLs user growth over most of the past 2 decades. Because AOL had a closed garden in its early years, its users were called subscribers. We can see that subscribers grew first, then revenue, and then market capitalization followed last. Figure 3
30000

AOL

$200,000

Subs (000) & R evenue

Market Cap ($mm) AOL Subs (000) Revenue ($mm)

$0

1992

1993 1994 1995

1996 1997 1998

1999 2000 2001

2002

Source: Company reports, Needham & Co, LLP research. * We would suggest throwing out the market cap per subscriber metric in 1999, as it was the peak of the Internet bubble.

As illustrated from Figure 4 below, if we look at both revenue and market cap through the common prism of subscriber growth, we can see more clearly that market cap lagged revenue per subscriber. In 2001 and 2002, we have subtracted our estimate of Time Warners value from AOL Time Warners market cap before dividing by AOLs subscribers. We covered AOL Time Warners stock back then and have retained our detailed sum-of-the-parts estimates from that time. AOLs revenue per sub was about $400 and its market capitalization per sub was about $4,000 in 2002, suggesting a valuation multiple of 10x revenue. Figure 4
$400

Mkt C ($mm) ap

($mm)

AOL

$10,000

$381

$10,000

$267 $222 R ev/Sub Revenue per Sub $142 $2,333 $50 $140
$0

$275 $240 $208 $4,200

$287 M C kt ap/Sub
$0

$5,600 $4,000 $3,846 Mkt Cap per Sub

$52 $200

$58 $500

$1,200 $1,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Source: Company reports, Needham & Co, LLP research. * We would suggest throwing out the market cap per subscriber metric in 1999, as it was the peak of the Internet bubble. An Investment Analysis by Needham & Company, LLC 13

Conclusions from AOL Analysis What can we conclude from the first 11 years of AOLs public market existence? As illustrated in Figure 4 above, AOLs market cap lagged revenue per subscriber growth, and the revenue multiple expanded for most of the early years. After AOLs 1999 peak valuation of $10,000 per subscriber (41x revenue), AOLs market cap per subscriber settled down to $4,000 per subscriber in both 2001 and 2002 and its revenue per user continued to rise. Yahoo! Figure 5 shows Yahoos user growth for the first decade after it came public in 2Q96. Yahoo! was always an advertising-driven business model, so its user adoption was much faster than AOLs. At the end of 1996, Yahoo! had 700,000 users, which grew to 1.2mm users over the next 4 years. As evidenced by Figure 5, we again see unique visitors leading revenue growth, but in YHOOs case market cap lead revenue growth. We note that owing to the Internet bubble, the market cap got ahead of the revenue growth for 2 short years, after which it corrected to reflect the revenue line with about a 2 year lead vs YHOO's revenue growth. Interestingly, YHOO s market cap peaked 2 years before its revenue peaked. It may be a coincidence, but perhaps Googles early successes in 2004 and 2005 were discounted into YHOOs market cap years before it appeared in YHOOs financial statements. Figure 5
7500

Yahoo!
Revenue ($mm)

$60,000

Subs & Rev ($mm)

Market Cap ($mm)

Unique Global Visitors (mm)


0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Company reports, Needham & Co, LLP research. * We would suggest throwing out the market cap per subscriber metric in 1999, as it was the peak of the Internet bubble.

$0

As illustrated by Figure 6 below, if we look at both revenue and market cap through the common prism of subscriber/user growth, we can see more clearly that market cap rose in anticipation of revenue per subscriber growth. (This analysis for YHOO is complicated by the Internet bubble.) The market cap/revenue multiplier was again stable at about 10x throughout the 2001 to 2005 period (6-10 years after going public.) Figure 6 illustrates that YHOOs market capitalization lead its revenue growth
14 An Investment Analysis by Needham & Company, LLC

Mkt Cap($mm)

by 1-2 years, and the market capitalization rolled over 2 years before the revenue per subscriber began to fall. Figure 6
$16 $721

Yahoo!
$13 $13

$14 $13 $10

$750

Revenue per User $9 $6

$7 $6 $4

$5 $3 $3 $136 $55 $3 $105 $3

$112 $46 $47

$135 $135

$73 $65 $30 $40 $35 $29 Mkt Cap per User $0 2004 2006 2008 2010

$0 1996

1998

2000

2002

Source: Company reports, Needham & Co, LLP research. * We would suggest throwing out the market cap per subscriber metric in 1999, as it was the peak of the Internet bubble.

Conclusions from Yahoo! Analysis What can we conclude from the first 16 years of Yahoos public market existence? As illustrated in Figure 6 above, the market capitalization to revenue multiplier of YHOO began at 20 (much like FB) and then doubled to 40 within 12 months. After the internet bubble, YHOO market capitalization to revenue settled in at about 10x and the market led the revenue per sub growth by about 2 years. Google We believe that GOOG is the most comparable consumer-facing global internet platform to FB. GOOG was always an advertising-driven business model and its global platform provided a valuable service to Internet users by creating a new way to index internet content. Googles search function made the Internet easier to navigate. As a result, Googles user adoption globally was much faster than Yahoos and AOLs. In 2005, one year after coming public, Google had 380mm unique visitors globally. This dwarfs the 800,000 unique users for Yahoo and 600,000 subscribers for AOL one year after they came public. Googles monthly unique visitors recently hit 1 billion users be month, only 8 years after coming public. Importantly, Facebook had 901mm at 3/31/12, before it becomes a public company. Figure 7 shows Googles unique monthly visitors, revenue and market capitalization, since it became public in 2004.

An Investment Analysis by Needham & Company, LLC 15

M kt Cap/Unique User

$521 Rev/Unique User

$11

Figure 7
1,000,000

GOOG
Market Cap

$220,000

Subs (000) & Rev ($mm)

Unique Visitorys WW Revenue


$0

2004

2005

2006

2007

2008

2009

2010

2011

Source: Company reports, Needham & Co, LLP research.

As illustrated by figure 8 below, if we look at both revenue and market cap through the common prism of unique visitor growth, we can see clearly that GOOGs market cap rose in anticipation of revenue per visitor growth. Googles market cap led its user growth in the early years. Since 2008 (the worst ad recession in 30 years), GOOGs multiple of revenue has been under pressure. Over the past 3 years, Googles valuation has been stable at around $200 of market cap per unique monthly user, and about 6-8x revenue. Figure 8
$80 $404 Mkt Cap per User
Rev/Unique User

Mkt Cap ($mm)

GOOG

$500

$290 $325 $31 $21 $16 Revenue per User $125 $0 2005 2006 2007 2008 2009 2010 2011 $28 $28 $234 $205 $32 $210 $38

$0

Source: Company reports, Needham & Co, LLP research.

Conclusions from Google Analysis Googles market capitalization has generally led or been coincident with its growth of unique users, although since FB began to gain traction in 2008 and the ad market had its worst ad recession in 30 years, GOOGs market cap multiple has about halved from 13-14x in 2006 and 2007 to 6-8x in 2009, 2010 and 2011. We note that this mirrors YHOOs behavior when GOOG entered its market.
16 An Investment Analysis by Needham & Company, LLC

Mkt Cap/Unique User

Implications for Facebooks Valuation We believe that the leading indicator of valuation for a global internet platform is consumer adoption. There are no exit barriers on the Internet so the minute there is a better mousetrap, consumers reallocate their time. Today, the FB platform has the most minutes spent by consumers globally. Because each subsequent Internet platform comes into being at a more mature stage of the internet, there is faster consumer adoption and lower risk because there are more visible revenue streams (proven economics) and therefore forward revenue optionality is easier to assess. What does this analysis imply about FBs Valuation? Is FB expensive or cheap? Lets take a look at the revenue per unique visitor since Yahoo and Google came public and compare it to FB. Figure 9 shows the revenue per unique user since each company went public and shows that GOOGs higher valuation is tied to its higher revenue per subscriber from the beginning. In FY12E, we expect Facebook to hit about $6/unique vs $7 for YHOO vs $40 for Google. Yahoo hit a high of $14 and Googles is still growing its revenue per unique global user. We note that FB has been growing its unique users and engagement lengths per user at unprecedented rates, which holds back its growth of revenue per user versus its peers. Figure 9
$16 $14 $12 $10 $8 $6 $4 $2 $1996 1998 2000 2002 2004 2006 2008 2010 2012E
Source: S-1, Needham & Co, LLP research.

Revenue per WW Unique User $13 $14

$40 $13 $38 $32 $11 $28 $10

45 40 35 30 25

$13 YHOO $9 $6 $5 $3 $3 $3 $3 $4 $6 $16 $31

$28 GOOG $21

$4

$5

$7 7 20 $5 $6 15

Facebook 10

5 0

Market capitalization is another interesting metric. Using year end share prices, Yahoos has been stable at 3-4 and googles has been at 6-8 over the past 3 years. Both came public at a revenue multiple that rose over the first 12 months and then came down as the revenue streams got reported in the P&L.

An Investment Analysis by Needham & Company, LLC 17

Figure 10
250 200 150 106 100 50 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11
Source: Company reports, S-1, Needham & Co, LLP research.

219 Mkt Cap/Revenue Multiples 20 17 14 13 GOOG 40 21 YHOO 17 14 10 18 15 11 4 5 5 8

25 FB multiple:19x 20 15 7 10 6 5 2 4 3 4 0

Other Valuation Metrics Our BUY rating is based on several forms of valuation, summarized in Table 4 below.

Table 4: FB Valuation Summary & Conclusions 2012E Valuation Multiples Embedded Expectations Metrics
1 2 3 4 5 EV/Sales EV/OIDBA P/E FCF/Share EV/FCF 15.1 26.4 135.3 $0.31 89.9 7 Breakeven DCF (Calculated as the 10-Yr EBITDA CAGR required to justify current share price)

21.5%

6 FCF Yield 1% Sources: Needham & Company research & estimates.

1. The Breakeven DCF valuation methodology uses the current share price to calculate the markets growth expectations for the enterprise, including capital efficiency trends. This valuation methodology concludes that FB must achieve a 10-year OIBDA compound annual growth rate of approximately 21.5% to justify its current share price. (Please see Table 6.) 2. In Table 7, we summarize several valuation multiples for Sales (15.1x), OIBDA (26.4x) and P/E (135.3x). FBs EV/FCF trading multiple is approximately 89.9x 2012E and has a 1% FCF Yield in FY12E. 3. In Table 9, we present comparative valuation metrics.

18 An Investment Analysis by Needham & Company, LLC

Table 5

Facebook: Standard DCF Calculation, 2013E-2022E


$ and shares in millions, except per share data

Valuation Conclusions Sum of PV of Free Cash Flow 1 PV of Terminal Value Discounted at WACC 1 Value of Operations (WACC Method) Plus: Cash at 3/31/12A Plus: Non-Consolidated Assets (From PMV) Less: Minority Interest Less: Unfunded Retirement Liabilities Enterprise Value Debt at 3/31/12A Less: Lease Obligations Less: Preferred Stock Outstanding Less: Value of Options & Restricted Sk, After-tax Common Equity Value Fully Diluted Shares Out, 2013E DCF Value/Share Current Share Price @ 5/22/12 Upside Potential (DCF-Current Price/Current Price)
1

% of Total $44,603 $67,652 $112,255 $10,312 $0 $0 $0 $122,567 $0 ($1,400) $0 ($11,000) $110,167 2,750 $40.06 $31.00 29% 36% 55% 92%

Standard Discounted Cash Flow (DCF) Valuation Why We Calculate: DCF is a rigorous bottoms-up valuation of the enterprise focusing on cash flows (not accounting) Strengths 1 Focuses on operations. Removes financing 2 Focuses on FCF. Removes non-cash accounting 3 Explicitly forecasts capital needs (WC & CapX) 3 Uses a levered beta (widely available) 4 Ent value focus captures entire business model Weaknesses 1 Many assumptions. Valuation can be manipulated 2 Terminal value big & based on low visiblity projections 3 Model assumes constant debt/equity ratio 4 Complex to calculate 5 Calculates the enterprise value first, then equity value

100%

90%

Calculation of the Value of Operations (WACC Method) FYE 12/31: 2012E 2013E 2014E OIBDA (after sk comp exp & corp): $2,884 $3,679 $4,693 - Depreciation ($515) ($530) ($675) $50 $50 $50 + Option Exercise Proceed + Int & Inv Income only $10 $10 $10 EBIT $2,429 $3,209 $4,078 Cash Taxes (at 35%) ($486) ($1,123) ($1,427) Plus: Depreciation $515 $530 $675 Plus: Sk Based Comp Exp $403 $600 $185 $100 $272 $255 Working Capital Change Less: Capital Spending ($1,700) ($1,600) ($1,500) FCF from Operations $1,261 $1,888 $2,266 PV Discounted at WACC 2 $1,812 $1,961 Sum of PV of Free Cash Flow 3 Terminal Value of 2022E FCF PV of Terminal Value at WACC Discount Period
2

2015E $5,987 ($1,326) $40 $10 $4,712 ($1,649) $1,326 $180 $188 ($1,105) $3,651 $2,851

2016E $7,638 ($1,289) $30 $10 $6,389 ($2,236) $1,289 $175 $183 ($1,074) $4,725 $3,328

2017E $9,744 ($1,175) $30 $10 $8,609 ($3,013) $1,175 $170 $166 ($979) $6,128 $3,893

2018E $12,430 ($1,189) $30 $10 $11,281 ($3,948) $1,189 $165 $168 ($991) $7,864 $4,507

2019E

2020E

2021E

CAGR 2022E '13-22E 27.6%

$15,857 $20,229 ($1,156) ($1,054) $30 $30 $10 $10 $14,741 $19,215 ($5,159) ($6,725) $1,156 $1,054 $160 $150 $164 $149 ($964) ($878) $10,098 $12,965 $5,220 $6,045

$25,806 $32,920 ($1,067) ($1,297) $30 $30 $10 $10 $24,779 $31,664 ($8,673) ($11,082) $1,067 $1,297 $140 $140 $151 $184 ($889) ($1,081) $16,575 $21,121 $6,972 $8,014 $44,603 $178,305 $67,652 9

30.8%

3
3

Calculation of WACC: (Updated 8/20/11) 10-Year Risk Free Rate ("RFR") 2.0% Equity Risk Premium (Ibbotson-Arithmetic) 6.0% Beta (Needham Estimate) 1.60 Target Equity/(Debt + Equity) 90% Theoretical Debt Rating BBB Debt Spread 5.0% Marginal Tax Rate ("T") 40.0% WACC 10.9% (RFR+(Equity Risk Premium x Beta)) x % Equity/Total Capital + ((RFR + Debt Spread) x (1-T) x % Debt/Total Capital).

Calculation of Terminal Multiple (WACC Method) WACC Long-term Nominal GDP Growth WACC-GDP Growth FCF Terminal Multiple [1/(WACC-Growth Rate)] EBITDA Terminal Mutiple

10.9% 1.0% 9.9% 8.4 5.4

Sources: Company Reports, Needham & Company estimates.

An Investment Analysis by Needham & Company, LLC 19

Table 6

Facebook: Breakeven Discounted Cash Flow (DCF) Valuation Calculation, 2013E - 2022E
$ and shares in millions, except per share data

Valuation Conclusions Sum of PV of Free Cash Flow 1 PV of Terminal Value Discounted at WACC 1 Value of Operations (WACC Method) Plus: Cash at 3/31/12A Plus: Non-Consolidated Assets (From PMV) Less: Minority Interest Less: Unfunded Retirement Liabilities Enterprise Value Debt at 3/31/12A Less: Lease Obligations Less: Preferred Stock Outstanding Less: Value of Options & Restricted Sk, After-tax Common Equity Value Fully Diluted Shares Out, 2013E Breakeven DCF Value/Share Current Share Price @ 5/22/12 Discount to DCF Value (DCF-Current Price/DCF)
1

12/31/12E $34,348 $52,995 $87,342 $10,312 $0 $0 $0 $97,654 $0 ($1,400) $0 ($11,000) $85,254 2,750 $31.00 $31.00 0%

Breakeven Discounted Cash Flow Valuation Why We Calculate: BE DCF uses the current share price to calculate the market's growth expectations for the enterprise. Strengths 1 Makes no assumption about growth for first 10 years 2 Prevents over-optimism by working backwards 3 Data widely available and model well understood 4 Explicitly forecasts capital needs (WC & CapX) 5 Uses a levered beta (widely available)

Weaknesses 1 Terminal value big & based on low visiblity projections 2 Model assumes constant debt/equity ratio 3 Complex to calculate 4 Calculates the enterprise value first, then equity value

Calculation of the Value of Operations (WACC Method) FYE 12/31: 2012E 2013E 2014E OIBDA (after sk comp exp & $2,884 $3,740 $4,545 corp): - Depreciation ($515) + Option Exercise Proceed $50 + Int & Inv Income only $10 EBIT $2,429 Cash Taxes (at 35%) ($486) Plus: Depreciation $515 Plus: Sk Based Comp Exp $403 Working Capital Change $100 Less: Capital Spending ($1,700) FCF from Operations $1,261 PV Discounted at WACC 2 Sum of PV of Free Cash Flow 3 Terminal Value of 2022E FCF PV of Terminal Value at WACC 2 Discount Period ($530) $50 $10 $3,270 ($1,145) $530 $600 $272 ($1,600) $1,928 $1,850 ($675) $50 $10 $3,930 ($1,376) $675 $185 $255 ($1,500) $2,170 $1,878

2015E $5,523

2016E $6,712

2017E $8,156

2018E

2019E

2020E

2021E

Required LT 2022E Growth Rate $21,614 ($1,297) $30 $10 $20,357 ($7,125) $1,297 $140 $184 ($1,081) $13,772 $5,225 $34,348 $139,674 $52,995 9

$9,911 $12,044 $14,636 $17,786

21.5%

($1,326) ($1,289) ($1,175) ($1,189) ($1,156) ($1,054) ($1,067) $40 $30 $30 $30 $30 $30 $30 $10 $10 $10 $10 $10 $10 $10 $4,248 $5,463 $7,022 $8,762 $10,928 $13,623 $16,759 ($1,487) ($1,912) ($2,458) ($3,067) ($3,825) ($4,768) ($5,866) $1,326 $1,289 $1,175 $1,189 $1,156 $1,054 $1,067 $180 $175 $170 $165 $160 $150 $140 $188 $183 $166 $168 $164 $149 $151 ($1,105) ($1,074) ($979) ($991) ($964) ($878) ($889) $3,350 $4,123 $5,096 $6,227 $7,620 $9,330 $11,362 $2,615 $2,904 $3,238 $3,569 $3,939 $4,350 $4,779

3
3

Calculation of WACC: (Updated 8/20/11) 10-Year Risk Free Rate ("RFR") 2.0% Equity Risk Premium (Ibbotson-Arithmetic) 6.0% Beta (Needham Estimate) 1.60 Target Equity/(Debt + Equity) 90% Theoretical Debt Rating BBB Debt Spread 5.0% Marginal Tax Rate ("T") 40.0% WACC 10.9% (RFR+(Equity Risk Premium x Beta)) x % Equity/Total Capital + ((RFR + Debt Spread) x (1-T) x % Debt/Total Capital).

Calculation of Terminal Multiple (WACC Method) WACC Long-term Nominal GDP Growth WACC-GDP Growth FCF Terminal Multiple [1/(WACC-Growth Rate)] EBITDA Terminal Mutiple

10.9% 1.0% 9.9% 10.1 6.5

Sources: Company Reports, Needham & Company estimates.

20 An Investment Analysis by Needham & Company, LLC

Table 7

Table 8

Facebook: Valuation Multiples (Sales, OIBDA, P/E)


$ and shares in millions, except per share data

Facebook: Free Cash Flow Valuation Metrics


$ and shares in millions, except per share data

Valuation Conclusions Market-Based Enterprise Value 2012E Sales (From Annual Projections) EV/Sales Market-Based Enterprise Value 1 2012E OIBDA (From Annual Projections) EV/2011E OIBDA 12-Month Target Price Target Price EV/2013E OIBDA Current Price 5/22/12 2012E EPS (From Annual Projections) P/E Ratio
1 1

2012E $76,235 $5,041 15.1 $76,235 $2,884 26.4 $40.00 30.4 $31.00 $0.23 135.3

Valuation Conclusions FCF/Share Current Price FCF Yield


2

2012E 5/22/12 $0.31 $31.00 1% $848 $2,884 29% $76,235 $848 89.9
(3.6) ($10,312) -12.1%

FCF 2 2012E OIBDA (From Annual Projections) FCF Conversion Rate (FCF/OIBDA) Market-Based Enterprise Value 1 FCF 2 EV/FCF Net Debt/OIBDA Net Debt + Unfunded Retirement Liabs Net Debt/Market Cap
2

Calculation of Market-Based Enterprise Value


05/22/12 2012E $31.00 2,747 $85,147 ($10,312) $0 $0 $0 $1,400 $0 $11,000 $76,235

Calculation of Free Cash Flow


2012E $2,884 $50 $0 $0 $0 ($486) $100 ($1,700) $848 2,747 $0.31

Year End 12/31: Current Share Price Fully Diluted Shares Out Market Capitalization

Less: Excess Cash & Mktable Debt Sec Less: Non-Consolidated Assets (See PMV) Plus: Unfunded Retirement Liabilities Plus: Debt @ 12/31/12 Plus: Lease Obligations Plus: Preferred Stock Outstanding Plus: Value of Options Restricted Sk Market-Based Enterprise Value

Year End 12/31: OIBDA Plus: Option Exercise Proceeds Less: Cash Interest Expense Minority Interest Less: Preferred Dividends Less: Cash Taxes Less: Change in Working Capital Less: Capital Spending (PP&E) Free Cash Flow Shares Outstanding FCF/Share

Sources: Company Reports, Needham & Company estimates.

Sources: Company Reports, Needham & Company estimates.

An Investment Analysis by Needham & Company, LLC 21

Table 9
Needham & Company - Comparable Table: Internet and Digital Media Universe
Kerry Rice, CPA (415) 262-4890
Price 5/22/12

krice@needhamco.com
Revenue 12'-13' CY12E CY13E Y/Y % $5,041 $63,428 $14,015 $35,456 $905 $4,470 $6,526 $81,749 $16,055 $42,172 $1,345 $4,586 29% 29% 15% 19% 49% 3% 23% -1% 13% 9% 19% 11% 11% 6% 47% 11% 19% 9% 5% 7% 41% 3% 14% 29% 22% 10% 6% 15% 10% 28% 20% 29% 7% N/A 23% 16% 19% 16% 18% 16% 16% 21% 2% 19% 17% 16% 5% 21% 15% 14% 47% 11% 4% 17% 18% 19% 0% 14% 7% 44% 17% 16% EV/EBITDA CY12E CY13E 28.5 31.5 10.5 10.4 58.5 10.5 24.3 x 22.0 EBITDA CY12E CY13E $2,884 $3,740 12'-13' Y/Y % 30% 39% 14% 21% 70% 7% 30% 1% 17% 23% 21% 17% 19% 28% -169% 12% 20% 14% 14% 26% -335% 7% -19% 39% 28% 17% 15% 14% 12% 98% 28% 32% 11% 14% 26% 28% 17% 27% 39% 25% 23% 24% 0% 32% 73% 21% 11% 64% 30% 18% -65% 12% 16% 191% 24% 24% N/M 22% 14% 77% 31% 17% EBITDA Margin 57% 5% 32% 53% 20% 36% 29% 16% 27% 13% 53% 18% 19% 14% -5% 26% 43% 30% 19% 16% -3% 36% 21% 5% 28% 5% 20% 32% 20% 15% 21% 36% 17% 11% 37% 17% 12% 16% 13% 21% 19% 25% 20% 16% 5% 13% 23% 9% 15% 34% -33% 41% 16% 3% 40% 31% -8% 19% 30% 19% 17% 19%

Ticker Company FB AMZN EBAY GOOG LNKD YHOO Facebook, Inc. AMAZON.COM INC EBAY INC GOOGLE INC LINKEDIN CORP YAHOO INC Mean AOL INC Demand Media Inc. EHEALTH INC GOOGLE INC IAC/INTERACTIVECORP INFOSPACE INC MOVE INC Pandora Media Inc. TRAVELZOO INC TripAdvisor Inc. VALUECLICK INC WebMD Health Corp. XO GROUP INC Yelp Inc. YAHOO INC Mean AMAZON.COM INC HOMEAWAY INC BLUE NILE INC DIGITAL RIVER INC EBAY INC EXPEDIA INC Groupon Inc. LIQUIDITY SERVICES INC MercadoLibre Inc. ORBITZ WORLDWIDE INC PetMed Express Inc. PRICELINE.COM INC SHUTTERFLY INC VISTAPRINT NV Mean ACTIVE NETWORK INC COMSCORE INC CONSTANT CONTACT INC LIVEPERSON INC QUINSTREET INC RESPONSYS INC REACHLOCAL INC SAPIENT CORP TECHTARGET INC VOCUS INC Mean

Market EPS 12'-13' EV/S Ratio PE Ratio Cap. CY12E CY13E CY12E CY13E Y/Y % CY12E CY13E 52.2 $0.48 $0.60 23% 16.3 12.6 1.1 3.0 4.6 7.9 3.6 4.1 x 1.1 1.7 1.4 4.6 1.2 1.1 1.1 2.6 1.9 6.5 1.8 1.7 1.2 5.3 3.6 2.5 x 1.1 5.4 0.9 N/M 3.0 1.2 2.1 3.4 6.3 0.7 N/A 4.6 1.1 1.1 2.1 x 1.3 1.9 1.8 4.1 1.0 2.4 0.3 1.0 1.6 1.3 1.6 x 1.8 2.9 2.8 1.0 0.8 4.5 3.1 0.5 2.8 2.8 6.7 2.5 x

EV $82,135 $93,351 $47,702 $194,612 $10,680 $16,694

$31.07 $85,339 64.4 $215.36 $39.36 $600.61 $101.53 $15.31 $99,066 $51,483 $238,473 $11,301 $18,771 180.3 16.7 13.9 151.6 16.1 75.7 x

Large Cap
83.1 $1.19 $2.59 14.4 $2.36 $2.73 11.8 $43.30 $50.71 82.0 $0.67 $1.24 14.2 $0.95 $1.08 41.1 x $1.04 $0.42 $0.42 $50.71 $3.40 $1.20 $0.52 $0.03 $1.68 $1.81 $1.31 $0.84 $0.39 $0.05 $1.08 117% 1.5 16% 3.4 17% 5.5 85% 11.8 13% 3.7 50% 5.2 x 0% 25% 35% 17% 23% 10% 42% NM 10% 22% 9% 22% 33% NM 13% 20% 1.1 1.9 1.5 5.5 1.3 1.3 1.2 3.9 2.1 7.8 2.0 1.8 1.3 7.4 3.7 2.9 x 22.6 $2,965 $4,130 9.2 $4,541 $5,190 8.6 $18,733 $22,585 34.5 $183 $310 9.8 $1,590 $1,702 16.9 x

Internet Media
AOL DMD EHTH GOOG IACI INSP MOVE P TZOO TRIP VCLK WBMD XOXO YELP YHOO $27.13 $9.36 $17.02 $600.61 $45.23 $12.72 $8.20 $10.15 $23.70 $42.75 $17.56 $22.16 $9.05 $18.01 $15.31 $2,577 $776 $348 $238,473 $4,148 $521 $322 $1,660 $380 $5,821 $1,442 $1,238 $240 $1,101 $18,771 26.0 26.0 $1.05 27.9 22.3 $0.34 55.2 40.8 $0.31 13.9 11.8 $43.30 16.3 13.3 $2.77 11.7 10.6 $1.09 22.5 15.8 $0.37 N/M 358.6 ($0.13) 15.5 14.1 $1.53 28.8 23.6 $1.48 14.6 13.4 $1.20 32.1 26.3 $0.69 30.7 23.1 $0.30 N/M 346.5 ($0.19) 16.1 14.2 $0.95 23.9 x 64.0 x N/M 50.3 45.5 11.8 16.7 15.0 63.8 35.3 33.8 12.2 14.7 20.8 N/M 18.9 31.4 x N/M 14.9 24.2 39.2 9.2 48.9 N/M 16.2 18.3 38.0 24.9 x 14.0 N/M 16.9 29.9 630.1 25.3 22.1 N/M 16.4 10.0 130.7 90.6 x $2,117 $352 $156 $35,456 $2,664 $379 $198 $404 $157 $772 $714 $504 $135 $130 $4,470 $2,095 $399 $169 $42,172 $2,970 $421 $209 $593 $175 $922 $779 $530 $145 $185 $4,586 $2,323 $681 $232 $194,612 $3,469 $476 $231 $1,570 $331 $6,027 $1,439 $895 $172 $970 $16,694 6.8 6.7 $340 $345 7.3 6.2 $94 $109 11.1 9.0 $21 $26 10.4 8.6 $18,733 $22,585 7.3 6.2 $476 $559 6.5 5.5 $73 $87 8.5 6.6 $27 $35 N/M 119.9 ($19) $13 8.2 7.3 $40 $45 18.2 15.1 $331 $399 6.7 5.9 $216 $245 9.5 8.3 $94 $108 7.8 6.2 $22 $28 N/M N/M ($5) $11 10.5 9.8 $1,590 $1,702 9.1 x 15.8 x 31.5 23.3 17.7 2.3 10.5 6.9 18.0 20.0 22.6 4.3 6.8 15.3 7.6 11.0 12.3 x 12.7 10.3 11.0 20.3 4.9 18.2 8.6 8.8 7.4 17.7 11.4 x 6.0 -12.9 7.6 6.3 28.1 13.3 12.0 -5.6 17.3 9.9 51.1 11.3 x 22.6 18.2 15.1 2.0 9.2 6.1 9.1 15.7 17.1 3.9 6.0 12.1 6.0 9.4 9.5 x $2,965 $79 $21 $81 $4,541 $753 $361 $100 $142 $138 $27 $2,022 $99 $137 $4,130 $102 $24 $93 $5,190 $844 $713 $127 $187 $153 $31 $2,547 $127 $160

E-Commerce
AMZN AWAY NILE DRIV EBAY EXPE GRPN LQDT MELI OWW PETS PCLN SFLY VPRT

$215.36 $24.50 $30.54 $14.43 $39.36 $42.74 $11.85 $62.71 $76.11 $3.23 $11.54 $660.01 $25.31 $36.90

$99,066 $2,070 $431 $533 $51,483 $5,954 $7,633 $2,056 $3,360 $339 $235 $33,890 $902 $1,426

83.1 $1.19 $2.59 37.8 $0.49 $0.65 37.6 $0.67 $0.81 10.6 $1.22 $1.36 14.4 $2.36 $2.73 13.0 $2.84 $3.30 17.9 $0.19 $0.66 28.2 $1.78 $2.22 25.5 $2.25 $2.98 8.3 $0.26 $0.39 13.5 $0.79 $0.86 16.6 $31.75 $39.68 51.8 $0.15 $0.49 15.6 $1.96 $2.36 25.3 x N/M 12.5 18.9 32.9 9.0 34.9 86.2 13.2 16.5 23.0 25.9 x 11.2 N/M 14.4 19.3 30.5 20.9 17.3 N/M 13.8 7.9 54.5 19.8 x ($0.60) $1.21 $0.88 $0.41 $0.87 $0.22 ($0.09) $0.65 $0.31 $0.39 ($0.15) $1.44 $1.12 $0.49 $0.89 $0.31 $0.10 $0.80 $0.34 $0.65

117% 1.5 33% 6.5 21% 0.9 11% N/M 16% 3.4 16% 1.4 256% 2.7 25% 4.1 32% 8.1 47% 0.7 9% 0.7 25% 5.6 222% 1.3 21% 1.3 79% 2.3 x NM 19% 28% 19% 2% 40% NM 23% 11% 66% 26% 1.6 2.2 2.0 5.0 1.0 2.9 0.4 1.1 1.7 1.6 1.7 x

$63,428 $283 $391 $406 $14,015 $3,819 $2,398 $486 $396 $812 $245 $5,480 $580 $1,156

$81,749 $344 $431 $432 $16,055 $4,195 $3,068 $581 $511 $867 N/A $6,726 $671 $1,376

$93,351 $1,847 $371 $184 $47,702 $5,182 $6,510 $1,991 $3,202 $591 $182 $30,841 $758 $1,505

Internet Marketing
ACTV SCOR CTCT LPSN QNST MKTG RLOC SAPE TTGT VOCS

$13.15 $765 $17.96 $634 $21.21 $660 $16.23 $915 $8.00 $366 $10.75 $572 $9.01 $262 $10.56 $1,520 $5.65 $231 $14.87 $290

$431 $278 $253 $162 $366 $164 $442 $1,151 $107 $167

$507 $323 $294 $196 $373 $195 $519 $1,332 $112 $202

$682 $604 $517 $807 $359 $475 $171 $1,316 $181 $266

9.1 $54 8.2 $59 8.9 $47 16.4 $40 4.9 $73 13.8 $26 5.0 $20 7.2 $150 6.6 $25 10.8 $15 8.7 x 5.1 -37.4 6.8 5.5 9.7 10.7 9.7 N/A 14.2 8.7 28.8 5.8 x $159 ($50) $80 $157 $120 $64 $166 ($23) $22 $145 $21

$75 $74 $58 $49 $73 $34 $35 $182 $27 $25

Internet Services

ACOM Ancestry.com Inc. ANGI Angie's List Inc. DHX Dice Holdings Inc. MWW Monster Worldwide Inc. NFLX NETFLIX INC OPEN OPENTABLE INC RATE Bankrate Inc. RNWK RealNetworks Inc. STMP STAMPS.COM INC WWWW WEB.COM GROUP INC Z Zillow Inc. Cl A Mean Overall Mean

$21.95 $12.43 $10.10 $8.76 $67.89 $39.47 $18.31 $8.60 $24.58 $15.15 $36.94

$1,003 $709 $680 $1,030 $3,769 $915 $1,862 $297 $422 $736 $1,145

$1.57 ($0.97) $0.60 $0.29 $0.11 $1.56 $0.83 ($1.37) $1.50 $1.52 $0.28

$1.96 25% 2.0 ($0.41) NM 4.2 $0.70 17% 3.1 $0.45 55% 1.0 $2.23 1967% 0.9 $1.88 21% 5.3 $1.06 28% 3.7 ($0.79) NM 0.5 $1.78 19% 3.2 $1.91 26% 2.9 $0.68 140% 9.6 233% 3.1 x 82%

$465 $152 $198 $990 $3,625 $162 $532 $278 $116 $487 $111

$529 $224 $220 $1,033 $4,241 $192 $635 $278 $132 $521 $159

$951 $639 $612 $991 $3,364 $857 $1,992 $130 $373 $1,433 $1,062

$187 ($17) $90 $182 $348 $80 $205 N/A $26 $164 $37

44.1 x 36.2 x

2.7 x 2.3 x

12.2 x 10.8 x

Source: Needham & Company Research

22 An Investment Analysis by Needham & Company, LLC

FACEBOOK BUSINESS DESCRIPTION What is Facebook? FB is a social networking service that can be found at Facebook.com. As of March 31, 2012, on a global basis, FB had 125 billion friendships, 901mm monthly active users, 526 million daily active users, 3.2 billion likes and comments each day, and 300mm photos uploaded every day, according to FBs S-1 filing. To use FB, users must register and create a personal profile and then add other users as friends. They can then send messages and receive automatic notifications when anyone in their network updates their profile. Users can create profiles with photos, lists of personal interests, contact information, and other personal information. Users can communicate with friends and other users through private or public messages and a chat feature. They can also create and join interest groups and "like pages". (Source: FB S-1.) A 2012 Pew Internet and American Life study identified that between 2030% of Facebook users are "power users" who frequently link, poke, post and tag themselves and others. 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", etc. A DoubleClick study reported that that FB hit one trillion pageviews in the month of June 2011. As illustrated in Figure 11, FBs Monthly and Daily Active Users have been growing rapidly and consistently for the past 13 quarters. Figure 11

Source: Facebook S-1

FB Growth Benefits from Closing the Advertising Gap. We believe that revenue follows time spent. We expect advertising dollars to flow towards FB because it has the largest and most engaged user base. To date, spending has lagged the amount of time users spend on social networking sites. This is similar to the spending lag that occurred as traditional offline advertising spending moved online, as illustrated in Figure 12. We believe this gap will close.
An Investment Analysis by Needham & Company, LLC 23

Figure 12 2011 Gap between Time Spent Online and Advertising Highlights the Online Growth Opportunity
45% 40% 40% 40% % of Time and Advertising Budget 35% 30%
18% Gap

36%

25% 20% 15% 10% 5% 5% 0% TV Internet % of Time Spent Newspaper Magazines Radio 3% 7% 18% 15% 11% 11%

% of Advertising Spending

Source: eMarketer (2010), MagnaGlobal (2011), Needham & Co, LLC. The Gap between Spending and Time on Social Media Should Close Although 14% of online time is spent on FB, 67% of marketers spend 5% or less of their marketing budget targeting social media. Even by 2014, 45% of marketers budgets targeting social media could be less than 10% of their marketing budget, according to studies. Social media growth is still early in its growth cycle. We expect the gap between time spent and revenue to narrow as marketers allocate more of their advertising budgets to social media. Figure 13 shows the percent of companies that spent under 5% to over 20% of their marketing budget on social media in 2011. We believe this gap will close. Figure 13 While Marketers Advertising Spending on Social Media Should Grow Significantly over the Next Three Years, We Remain Early in the Growth Cycle
80% 70% 60% % f C m a ie o o pn s 50% 40% 30% 20% 10% 0% <5% 5-10% 2011 2014 10-20% 20%+

Source: Booz & Co, Buddy Media, and Needham & Company, LLC
24 An Investment Analysis by Needham & Company, LLC

Authentic Identity is a Competitive Advantage of FB Because FB is based on sharing with your friends, people normally use their authentic identity and share their true interests and concerns with their friends. This creates unique value for consumers, but also gives FB a competitive advantage compared with most other sites on the Web. Because users share information that reflects their real interests and demographics, advertisers have better odds of reaching an audience with higher accuracy rates compared to online industry averages. For example, FB campaigns targeted at adults 25-49 are often able to reach the desired audience with 95% accuracy as measured by industry-standard analytics tools. This compares to an industry average of 72%, as publicly reported by Nielsen in 2011. For more narrowly targeted campaigns, for example, females between the ages of 25 and 34, Facebook was able to reach the desired audience with 90% accuracy compared to an industry average of 35%. Facebooks advertising platform should be able to increase relevancy over time as users maintain and expand their usage on FB, and increasingly share their interests and preferences regarding products and services. Personalization Drives FB Value The very personal nature of the FB platform has the ability to enhance the believability of ads. Together, Nielsen and Facebook studied this issue. Nielsen analyzed 79 Facebook advertising campaigns over a period of six months and found that 76% of U.S. Internet users said that they most trusted recommendations from personal acquaintances (ie, friends). Facebook offers tools to advertisers to display social context (like friends comments) alongside their ads. As a result, advertisers are able to differentiate their marketing messages with trusted recommendations from a users friends. The Nielsen/Facebook study found that ads with a social context had > 50% lift in ad recall vs FB ads that did not have social context. Personalization enhances the relevance of ads. The holy grail is serving the right ad to the right person at exactly the right time. The FB platform allows advertisers to deliver their ads to a subset of FB users such as targeted by age, location, gender, education, work history, specific interests, etc. Advertisers can select audiences for their ads based on many metrics. These ad campaigns can target millions of users or hundreds of users. The flexibility of the FB platform and targeting maximizes the number of advertisers that can use the FB platform over time. FB Usage Trends Benefit from Smart Phone Adoption. In March 2012, Facebook highlighted that over 50% of its monthly active users (or 488 million users) accessed Facebook through mobile devices. The number of mobile Facebook users increased 4x from March 2010 and 39% over the last six months. Increased mobile usage was a primary contributor to Facebooks overall daily active user growth of 33%. Despite the rapid growth in mobile users, mobile access does not appear to be cannibalizing FBs desktop usage, given the continued strong growth in unique visitors to Facebooks PC website, which increased 21% y/y in March of 2012.
An Investment Analysis by Needham & Company, LLC 25

While today nearly 33% of the total U.S. mobile users and 24% of the five leading European markets users access social networking sites at least once a month, according to comScore, we believe significant growth opportunities remain as smartphone adoption grows. The top three mobile activities on social networking sites were: 1) posting status updates; 2) reading posts from people they know; and 3) reading posts from organizations, brands, and events. FACEBOOK MANAGEMENT SUMMARY Mark Zuckerberg, Chairman and Chief Executive Officer. Mr. Zuckerberg has served as the Companys CEO since 2004. He attended Harvard College and studied Computer Science. While at Harvard, he wrote a program called CourseMatch, which helped students choose classes based on the choices of other students, as well as to assist in forming study groups. He cofounded the predecessor to FB, along with 3 others, in 2004, and soon left Harvard before receiving his degree to focus full time on FB. He is the largest individual shareholder of FB with an approximate 28.4% ownership share. Sheryl Sandberg, Chief Operating Officer. Ms. Sandberg has served as COO since March, 2008. Prior to her employment with FB, she worked at Google from 2001 to 2008, where she served in a variety of positions, her most recent as Vice President, Global Online Sales & Operations. Ms. Sandberg graduated from Harvard College with a degree in Economics and she received an MBA from Harvard University. David Ebersman, Chief Financial Officer. Mr. Ebersman has served as CFO of FB since September, 2009. Prior to his employment at FB, Mr. Ebersman worked at Genentech from 1994 to 2009, where his most recent position was as CFO. Mr. Ebersman graduated from Brown University with a degree in Economics and International Relations.

26 An Investment Analysis by Needham & Company, LLC

APPENDIX A PROPRIETARY SURVEY OF FACEBOOK USERS We completed a proprietary online survey of 100 Facebook users worldwide in May of 2012. Facebook is a global platform and therefore our survey was global with 63% of respondents from the US, 25% from Asia (including India), and 12% from Europe. Their average age was 32, and the range of participants was 21 to 62 years old. Virtually all of the respondents said they visited Facebook at least once a day, and many said 3-5 times each day. Most said they spend 20-60 minutes per day. We asked them each 7 questions. The most interesting findings from this study included: Respondents each wrote out 4 and 5 positives about FB, but only 1 or 2 negatives each. The positives were largely grouped around 3 categories- engagement, reach and relevance - while the negatives were much more dispersed. About 25% said they would try to buy FB shares after it became public. C.U.E. Drives Upside Valuations for FB. In the first question, we asked survey participants to write down in their own words (ie, no boxes to check off) what they liked most about facebook. We got 400 unaided answers.. The majority of What I like answers were tightly grouped and fell into in 3 primary forms of Value-Added: Communication, Ubiquity, and Entertainment. We think of these Facebook value drivers as C.U.E. We also call these engagement, reach and relevance, which are key drivers of FBs valuation. Several examples are included below. Communication Value Connecting with Others 100% of respondents listed the Communication Value of FB among the top 5 likes. The granularity was more interesting, as evidenced by a sample of their words below: to keep in touch with family and friends and share my life (especially photo updates) I use it to find people with similar interests, such as music The possibility to exchange ideas with other people from other parts of the world find old friends who I havent spoken to in years know my friends and family plans for the week Ubiquity & Efficiency Value 40% of respondents listed the Efficiency Value of FB among the top 5 likes. Representative comments are included below: I like how almost everybody has one and Virtually everyone that I want to keep in touch with uses Facebook Facebook is available on a lot of devices/platforms I can message people for whom I do not have phone numbers Easy to organize & publicize events The like button allows me to acknowledge that I know about something without having a full conversation I like begin able to keep up on others lives without talking to them
An Investment Analysis by Needham & Company, LLC 27

Entertainment Value 30% of respondents listed the Entertainment Value of FB among the top 5 likes. Entertainment value elongates time spent on the FB site and drives higher revenue upside optionality. Representative comments are included below: The first thing I do when I have time free is facebook. After that, Ill play video games or watch Netflix or TV. Find out whats going to happen on my favorite cable shows before they air and You can watch videos, sports and news on there Its fun to see whats going on in video, jokes, news releases real time and There is some truly funny stuff I like how you can interact and play games at the same exact time and I like the Facebook games Downside Risks to FB In the second question, we asked survey participants to write down in their own words (ie, no boxes to check off) what they liked least about facebook. We got 200 unaided answers. What we found interesting about the negative responses was the lack of consensus view. Answers were much more dispersed than what they liked, with no more than 20% of respondents citing any one category of negatives. The top 5 cited categories of dont like responses were: Security issues Overuse/narcissism/banality of some people & comments Perception that FB sells information to private companies FB makes money using data they derive from users Fake users and accounts People you dont want to talk to can find out what youre up to Implications? We think the dispersion of these answers implies that users are NOT turning off their FB because of them. We think this implies that consumers are generally happy with FB, which supports FBs deep consumer penetrations and the long engagement times on the FB platform. Competitive Position When asked whether there were any Internet services that folks liked better than FB, 62% of respondents said no. Of the balance, Google and Twitter were the most frequently mentioned, followed by Linked-In, Last.fm, and Pinterest. Usage Trends When asked how much time they spent per day on FB, the answers generally ranged between 20 and 60 minutes per day. When asked whether they use FB more or less than one year ago, 60% said they used it more and 30% said they used it less. The balance said no change. We think these trends underscore FBs success at making their platform stickier with longer engagement lengths. Consumer Satisfaction Trends When asked to rate FB on a scale of 1 (hate) and 10 (love), 90% of respondents rated it above 5 and most rated the FB experience as like a lot or nearly love (ie, 2/3 of answers were a 6 or 7 rating). Interesting, about half of respondents said their rating had fallen over the past year.

28 An Investment Analysis by Needham & Company, LLC

ANALYST CERTIFICATION
I, La ura Martin, CFA, h ereby certify that the views expressed in this research report accurately refle ct my p ersonal views about the subject comp any (ies) and its (their) securi ties. I also certify that I have not been, am not, and will not be receivi ng direct or i ndirect compensati on in exchange for expressing the specifi c recommendation(s) in thi s report. I, Ke rry Rice, h ereb y certi fy th at the views expressed in this research report accurately refl ect my personal vi ews about the subject co mpa ny (ies) and its (the ir) securities. I also certify that I have n ot been, am not, and wi ll not b e receiving direct or indi rect compensation in exchange for expressing the specific re commendation(s) in this repo rt.

Price, Rating, and Price Target History: Facebook Inc. (FB/NYSE) as of 5-22-12
5/22/12 B : $40.0
41

40

39

38

37

36

35

34

33

32

31 Apr 12

May 12 Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: B, G.

An Investment Analysis by Needham & Company, LLC 29

Price, Rating, and Price Target History: Google, Inc. (GOOG/NASDAQ) as of 5-22-12
7/17/09 B : $500.0
750

10/16/09 B : $600.0

11/30/09 B : $615.0

1/22/10 B : $700.0

7/1/11 RS

7/15/11 B : $725.0

10/14/11 B : $750.0

700

650

600

550

500

450

400

350 Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: B, G.


Price, Rating, and Price Target History: AOL Inc. (AOL/NYSE) as of 5-22-12
12/8/10 B : $35.0
35

9/6/11 B : $20.0

4/10/12 B : $31.0

30

25

20

15

10 Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: B.

30 An Investment Analysis by Needham & Company, LLC

Price, Rating, and Price Target History: Apple Inc. (AAPL/NASDAQ) as of 5-22-12
9/15/09 SB : $235.0 11/17/09 B : $235.0 2/11/10 B : $280.0 8/9/10 B : $375.0 2/7/11 B : $450.0 8/4/11 B : $540.0 2/8/12 B : $620.0

700

600

500

400

300

200

100 Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: A, B, G.


Price, Rating, and Price Target History: Zynga Inc. (ZNGA/NASDAQ) as of 5-22-12
3/23/12 UP
15

4/19/12 H

14

13

12

11

10

6 Nov 11

Dec 11

Jan 12

Feb 12

Mar 12

Apr 12

May 12

Source: Factset (Prices) / Needham (ratings)

Disclosures applicable to this security: B, G.

An Investment Analysis by Needham & Company, LLC 31

Price, Rating, and Price Target History: Yahoo! Inc. (YHOO/NASDAQ) as of 5-22-12
7/12/10 B : $20.0
21

6/29/11 B : $19.0

20

19

18

17

16

15

14

13

12

11 Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: B, G.


Price, Rating, and Price Target History: Pandora Media Inc. (P/NYSE) as of 5-22-12
1/9/12 B : $13.0
22

20

18

16

14

12

10

8 May 11

Jun 11

Jul 11

Aug 11

Sep 11

Oct 11

Nov 11

Dec 11

Jan 12

Feb 12

Mar 12

Apr 12

May 12

Source: Factset (Prices) / Needham (ratings and target price)

Disclosures applicable to this security: B.

32 An Investment Analysis by Needham & Company, LLC

% of companies under coverage with this rating Strong Buy Buy Hold Under Perform Rating Suspended Restricted Under Review 6 59 33 1 <1 0 0

% for which investment banking services have been provided for in the past 12 months 0 14 5 0 0 0 0

Needham & Company, LLC. (the Firm) employs a rating system based on the following (Effective July 1, 2003): Strong Buy: A security, which at the time the rating is instituted, indicates an expectation of a total return of at least 25% over the next 12 months. Buy: A security, which at the time the rating is instituted, indicates an expectation of a total return between 10% and 25% over the next 12 months. Hold: A security, which at the time the rating is instituted, indicates an expectation of a total return of +/-10% over the next 12 months. Underperform: A security, which at the time the rating is instituted, indicates an expectation that the price will depreciate by more than 10% over the next 12 months. Under Review: Stocks may be placed UR by the analyst, indicating that the stock rating and/or price target are subject to possible change in the near term, usually in response to an event that may effect the investment case or valuation. Rating Suspended: Needham & Company, LLC has suspended the rating and/or price target, if any, for this stock, because there is not a sufficient fundamental basis for determining a rating or price target. The previous rating and price target, if any, are no longer in effect and should not be relied upon. Restricted: Needham & Company, LLC policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Needham & Company, LLCs engagement in an investment banking transaction and in certain other circumstances. For disclosure purposes (in accordance with FINRA requirements), we note that our Strong Buy and Buy ratings most closely correspond to a Buy recommendation. When combined, 65% of companies under coverage would have a Buy rating and 15% have had investment banking services provided within the past 12 months; Hold mostly correspond to a Hold/Neutral recommendation; while our Underperform rating closely corresponds to the Sell recommendation required by the FINRA. Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price appreciation may not correspond to the stated 12-month price target. For valuation methods used to determine our price targets and risks related to our price targets, please contact your Needham & Company, LLC salesperson for a copy of the most recent research report on the company you are interested in. To review our rating system prior to July 1, 2003 please refer to the following link

http://clients.needhamco.com/Research/Documents/DisclosureLegend2.pdf
Stock price charts and rating histories for companies under coverage and discussed in this report are available at http://www.needhamco.com/. You may also request this information by writing to: Needham & Co., LLC, 445 Park Ave., 3rd Floor (Attn: Compliance/Research), NY, NY 10022. ANALYST CERTIFICATION By issuing this research report, each Needham & Company, LLC analyst and associate whose name appears within this report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analysts and associates personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analysts or associates compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst or associate in the research report. The following disclosures (as listed by letter on the cover page) apply to the securities discussed in this research report: A The research analyst and/or research associate (or household member) has a financial interest in the securities of the covered company (i.e., a long position consisting of common stock). B The research analyst and research associate have received compensation based upon various factors, including quality of research, investor client feedback, and the Firms overall revenues, which includes investment banking revenues. C The Firm has managed or co-managed a public offering of securities for the subject company in the past 12 months. D The Firm and/or its affiliate have received compensation for investment banking services from the subject company in the past 12 months. E The Firm and/or its affiliate expect to receive or intend to seek compensation for investment banking services from the subject company in the next three months. F The analyst or a member of the analyst's household serves as officer, director or advisory board member of the covered company. F1 A person associated with the Firm (other than the research analyst) serves as officer, director or advisory board member of the covered company. G The Firm, at the time of publication, makes a market in the subject company. H The Firm and/or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company. I The analyst has received compensation from the subject company in the last 12 months. J The subject company currently is or during the 12-month period preceding the date of distribution of this research report was a client of the Firm and received investment banking services. J1 The subject company currently is or during the 12-month period preceding the date of distribution of this research report was a client of the Firm and received non-investment banking securities related services. J2 The subject company currently is or during the 12-month period preceding the date of distribution of this research report was a client of the Firm and received non-securities related services. K Our affiliate has received compensation for products and services other than investment banking services from the subject company in the past 12 months.
This report is for informational purposes only and does not constitute a solicitation or an offer to buy or sell any securities mentioned herein. Information contained in this report has been obtained from sources believed to be reliable, but Needham & Company, LLC makes no representation as to its accuracy or completeness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect our judgment as of the date of the materials and are subject to change without notice. The securities discussed in this report may not be suitable for all investors and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own investment decisions based on their financial situations and investment objectives. The value of income from your investment may vary because of changes in interest rates, changes in the financial and operational conditions of the companies and other factors. Investors should be aware that the market price of securities discussed in this report may be volatile. Due to industry, company and overall market risk and volatility, at the securities current price, our investment rating may not correspond to the stated price target. Additional information regarding the securities mentioned in this report is available upon request. Copyright 2012, Needham & Company, LLC, Member FINRA, SIPC.

An Investment Analysis by Needham & Company, LLC 33

Equity Options Disclosure


Any Equity Options Opinions (Opinions) contained within this report was prepared by the Equity Options Sales and Trading Desk of Needham & Company, LLC (Needham or the Firm) for distribution to Needhams clients. This Opinion consists of market information and general market commentary only. It is not intended to be an analysis of any security or to provide any information sufficient upon which to base an investment decision. THIS EQUITY OPTIONS OPINION IS NOT A PRODUCT OF NEEDHAMS RESEARCH DEPARTMENT AND IS NOT A RESEARCH REPORT. Unless otherwise specifically stated, the information and commentary expressed herein are solely those of the author and may differ from the information, views and analysis expressed by Needhams Research Department or other departments of the Firm or its affiliates. Needham and its affiliates may have positions (long or short), effect transactions or make a market in the securities or financial instruments referenced in this Opinion. Needham or its affiliates may engage in securities transactions that are not consistent with the information and commentary expressed in this Opinion. Needham may have provided investment banking or other services to the issuers mentioned herein and may solicit such services in the future. If this Opinion includes extracts or summary material derived from research reports produced by Needhams Research Department, you are directed to the most recent research report for further details, including analyst certifications and other important disclosures. Copies of such reports may be obtained from your Needham sales representative or at www.needhamco.com This material is provided for informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. Any investment decision by you should be based on your specific investment objectives and financial situation. Please contact your Needham sales representative for specific guidance. The information contained in this Opinion has been obtained from or is based upon sources believed to be reliable, but neither Needham nor the author makes any representation or warranty as to its accuracy or completeness. The information contained in this Opinion is as of the date specified herein. Needham does not undertake any obligation to monitor or update the information. Past performance is not indicative of future results and no representation or warranty, express or implied, is made with respect to future performance. Needham disclaims all liability for any loss that may arise (whether direct or consequential) from any use of the information contained in this Opinion. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many options transactions, any investor considering the purchase or sale of any options contract should consult with his or her tax advisor as to how taxes affect the outcome of contemplated transactions. Needham and its affiliates do not provide tax advice. OPTIONS ARE NOT SUITABLE FOR ALL INVESTORS. For further information on the risks associated therewith, please consult the Options Clearing Corporations options risk disclosure document available at the following web address: http://www.optionsclearing.com/about/publications/character-risks.jsp Clients should call the Equity Options Sales and Trading Desk (212-705-0369) for additional information. Copyright 2012, Needham & Company, LLC, Member FINRA, SIPC.

34 An Investment Analysis by Needham & Company, LLC