Facebook Inc.

:
The initial public
offerings (A)
Ruskin Lisa
Crystal Wei
 TABLE OF CONTENTS

01 Company Overview 04 Question 3

02 Question 1 05 Question 4

03 Question 2 06 Question 5

07 Question 6
1.Company
Overview
 COMPANY OVERVIEW

● Launched in February 2004 by

Mark Zuckerberg.
● Facebook provided an Internet
platforms to share comments,
upload photos, etc.
● Designed as a social utility to allow
friends to connect with each other
over on Internet.
 2. Question 1
● How does Facebook Inc. make money?
● What are the value drivers of its business?
● What is its comparative advantage relative
to other social networking companies?
A.How does Facebook Inc. make money?
Three main fields

01 02 03

THE THE SALE OF GEOGRAPHY

ADVERTISING VIRTUAL GOODS
98% of revenue in 2009 56% of revenue 2011 in US
95% of revenue in 2010 $13 million in 2009 Revenue also came from
85% of revenue in 2011 $106 million in 2010 Western Europe, Canada, and
$557 million in 2011 Australia
A.How does Facebook Inc. make money?

In 2011, Facebook
generated $1 billion in
net income.

An increase of 65% and

88% respectively from
2010 and 2009
B. What are the value drivers of its business?
Value of users:
- Advertises: the core value driver is “social
context” (According to online advertising
spending was $588 billion in 2011).
- Common users: the value driver is excellent user
experience.
● Monthly active users (MAUs) - increase of 48%
than a year earlier.
● Daily active users (DAUs) - increase of 3% from
2010 to 2011.
C. What is its comparative advantage?
Other social networking companies: MySpace, Google+.
Twitter, and LinkedIn.

Number of users Business model

01 Estimated 900 million user 02 Using the big data (user’s
in 2012. authentic identity, etc.)

Strategy Acquisition
03 Launched new product and
04 ● Has broader target than its
service every year. (Exhibit competitors.
1) ● By buying IG, etc.
3. Question 2
● Why is Facebook going public?
● What is the planned use of proceeds
from the offering?
 A. Why is Facebook going public?

01 02
● Raise fund from investors. ● Raises its reputation and
● Have resources to to develop brand value.
products and invest. ● Attracts more users and
● Shareholders are able to gain expands the market share.
value for their own stakes.
B. What is the planned use of proceeds from offering?
Pro forma for Pro forma for
stock option stock option +
IPO

Cash and $3,910 10,311

marketabl ● Used for working capital and
e other general corporate
securities purposes.
Working $3,980 10,381
capital
4. Question 3
● What was going on in the U.S IPO markets
prior to Facebook’s offering?
● What has been the performance of recent
IPOs?
A. What was going on in the U.S IPO market prior to
Facebook’s offering?
The global economy was slowly
recovering from the financial crisis of
2007-2009.
According to Exhibit 4:
● S&P 500 Index had fell by 5% in
05/2012
● NASDAQ 100 Index had stalled in
growth after having risen by 17%
from 12/2011 to 05/2012
● IPO activity had gone down
significantly in the US.
A. What was going on in the U.S IPO market prior to
Facebook’s offering?

According to Exhibit 5:
● Global IPO activity during
2012Q1 fell down dramatically
to $14.3 billion from $46.6
billion during 2011Q1.
● IPO activity in US have
dropped sharply since the
2011Q2.
 A. What was going on in the U.S IPO market prior to
Facebook’s offering?

● Number of IPOs also dropped

from 383 in 2011Q2 to 157 in
2012Q1.
 B. What has been the performance of recent IPOs?

● The stock price started to drop just after the 1st day of IPO.
● The IPO price of LinkedIn and Groupon was above the initial price range.
(LinkedIn increased its price range to $42 to $45 on the day before the pricing.)
● The IPO price of Zynga was in the price range, but its performance was not
good.
● There was a downturn in IPO market at that time.
 5. Question 4
● What is the intrinsic value of a Facebook share?
● How does the valuation compare to the price talk from the
underwriter?
A. What is the intrinsic value of a Facebook share?

01 02 03

A discounted cash
flow (DCF)
Market multiples of Pro forma for IPO
analysis comparable firms
The basic
approach to
value Facebook
is a discounted
cash flow (DCF)
analysis.
A. What is the intrinsic value of a Facebook share?
Revenue growth rate:
● Remain 40% in next 5 years (2012 - 2016).
● Decrease by 7.6% per year after 2016 to 2020.
● In the terminal year of 2021, the growth rate will be 2%.
Operating margin:
● Decrease from 45.7% (2011) to 35% (2021).
Tax rate:
● Remain 40% from 2011 - 2017
● Decrease by 1% per year after 2017 - 2021.
● The terminal tax rate will be 35%.
A. What is the intrinsic value of a Facebook share?
Increase in capital expenditure (CAPEX) + working capital (WC):
● Remain 67% of increase in sales (revenues) each year.
Cost of capital:
● Remain 11.1% until 2017 and decrease to 8% (2021).
→ The estimated price is $32.3 per share.
A. What is the intrinsic value of a Facebook share?

Another way approach to

value Facebook is the
use of market multiples
of comparable firms
(forecast of several firms
is the same industry as
Facebook).
A. What is the intrinsic value of a Facebook share?
According to Exhibit 12, in 2013:
● Facebook’s consensus Earnings per share (EPS) is $0.66
● The mean ratio of price/earnings is 57.6
→ Estimated price per share = $0.66 x 57.6 = $38.02 per share.
 A. What is the intrinsic value of a Facebook share?
Use pro forma for IPO to estimate
Pro forma Pro forma for the stock value, according to Exhibit
for stock stock option + 2:
option IPO
● Total shareholders’ equity of the
Total IPO = $11,998 - $5,579 = $6,419
stockholders
$5,579 $11,998 millions
equity
● In the case, assuming that 180
millions new Class A shares were
issued in IPO.
→ Estimated price per share =
6,419/180 = $35.66 per share
B. How does the valuation compare to the price talk
from the underwriter?
A discounted cash Market multiples of Pro forma for IPO
flow (DCF) analysis comparable firms

Estimated $32.3 $38.02 $35.66

price per
share
The lead underwriters had raised FB’s IPO to $34 - $38.
The estimated value per share of:
● DCF analysis is below the range.
● Market multiples of comparable firms is above the range.
● Pro forma for IPO is in this price range.
6 Question 5
● As a potential shareholder, what are your
concerns about Facebook or its stock
offering?
As a potential shareholder, what are your concerns
about Facebook or its stock offering?
01 According to exhibit 11:
- After 2016 to 2021, the revenue
growth rate would face a sudden
drop, from 40% to only 2%.
According to exhibit 3:
- In 2012Q1, there are 488 million
mobile MAUs.
→ It will impact the long-term revenue
since it was harder to deliver ads on
mobile platform than desktop platform.
As a potential shareholder, what are your concerns about
Facebook or its stock offering?

02 03

How to maintain the currently Facebook’s ability of

number of users which is sustainable innovation?
attractive to advertising Innovation is crucial for a
companies? technology company
The advertising revenue, which
is the major source of income to
Facebook.
 7 Question 6
● What is your recommendation for the CXT
Technology Fund?
THANKS
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