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Investment Overview for Facebook (NASDAQ:FB)
Share Count Calculation & Option Dilution
We have estimated Facebook's diluted share count to be around 2.4 billion. This includes 117 million of Class A stock, 1.76 billion of class B stock and roughly 550 million shares to account for option dilution. The option dilution includes both outstanding stock options as well as restricted stock units (RSUs), the details of which are available in Facebook's S-1 filing (Pg. F-24 and F-25). Without including option dilution, the Trefis price estimate for Facebook's stock would be around 29% higher than the present price estimate.
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Below we highlight key drivers of Facebook's value that present opportunities for upside or downside to the current Trefis price estimate for Facebook.
Facebook Text & Display Ads
- Average Facebook Users: We estimate that Facebook's average monthly unique visitors has increased from around 27 million in 2007 to 766 million in 2011, and it could continue to increase till the end of the Trefis forecast period. The availability of Facebook in large markets like China, where it is currently blocked, and the expansion of Facebook on mobile will be important in achieving such growth. With about 4.2 billion internet users worldwide expected by the end of our forecast period, there is room for additional upside for Facebook. There could be an upside of more than 10% to the Trefis price estimate for Facebook's stock if the number of average Facebook users were to increase to around 2.3 billion by the end of Trefis forecast period, instead of the 2 billion we currently forecast. On the other hand, social networking fatigue could also kick-in the long term, leading to slower-than-expected subscriber growth for Facebook. If average number of Facebook users grow to around 1.8 billion by the end of the Trefis forecast period, there could be a 10% downside to our price estimate
- Page Views per User per month: We expect Page Views per User to increase from around 1,200 per month in 2011 to over 1,500 per month by the end of Trefis forecast period. Facebook has taken a few initiatives of late to improve the engagement on its site. This includes innovative products like the recently launched Timeline, as well as the inclusion of more digital content driven by content partners like Spotify and The Washington Post. However, competitors like Google+ could also lead to a reduction in Facebook's user engagement, especially if subscribers find other/better alternatives to connect online. If page views per user per month increase to around 1,800 in the long term, there could be a 10% upside to our price estimate. However, the same stock could see a 10% downside if page views drop to around 1,300 in the same period.
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Facebook is the world's most popular social network that helps people connect with family and friends. The company makes money primarily through display advertising, which it provides to advertisers by targeting specific demographics based on their information posted on Facebook. In addition, Facebook facilitates the purchase of virtual goods in games and applications running on Facebook's platform, charging a transaction fee on each virtual good purchased. Facebook is also expected to enter the physical goods market considering the steep growth expected in social e-commerce.
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We believe that the Text & Display Ads business is the primary source of value for Facebook for the following reason:
Text and Display Ads
This remains the biggest division for Facebook, contributing almost 80% to its overall value. This is primarily because of 2 factors: scale and user engagement. Facebook already 845 monthly active users (MAUs), which is expected to cross 1 billion this year. In addition, the user engagement within this user base is also high, clocking around 1,200 monthly page views for every user. The high engagement is a result of innovative product development at Facebook, such as the Timeline, which is designed with the long-term vision of ensuring that user stickiness to Facebook remains high. In future years, both scale and user engagement are expected to be strongly driver by growth in the mobile space, which would include more monetization on Facebook's mobile-based products.
Payments on Virtual Goods
Facebook also makes money by acting as a platform for the purchase of virtual goods on social gaming applications. The key gaming developer for Facebook is Zynga, which collectively constituted close to 12% of Facebook's revenues in 2011. Zynga's games like Farmville and Poker have been wildly popular, enabling Facebook to extract a sizeable revenue share from the sale of virtual goods like poker chips. As the virtual goods market expands further, Facebook's massive scale should continue to keep it as the preferred platform for game developers.
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Mobile Advertising to Drive Future Growth
Till the end of 2011, Facebook did not generate meaningful revenues from its mobile products, despite the 425 monthly active users (MAUs) who use Facebook's mobile products. However, given that the mobile advertising market is expected to grow to around $24 billion in 2015, Facebook is expected to reach out to mobile advertising networks in future to ensure that it also monetizes its mobile subscriber base.
Zynga Direct Might be a Threat to Facebook
In 2011, Facebook generated around $557 million through the sale of virtual goods on its website. While the market for virtual goods is expected to expand further, Facebook's largest gaming partner, Zynga, has already launched its own gaming platform Zynga Direct. Consequently, if Zynga reduces its reliance on Facebook as a platform, the latter could lose market in the global virtual goods market.
Google+ Has Integration Advantages
For now, Google+ remains the underdog in the social networking market. However, Google is aggressively pursuing growth for Google+, expanding its user base to more than 100 million in around 6 months. In addition to this, Facebook also needs to watch out for further integration of Google features like YouTube on Google+, which could increasingly make it a more engaging website with attractive digital content.
Social Commerce Expected to Grow
According to eMarketer, the global social commerce market is expected to grow from around $5 billion in 2011 to around $30 billion in 2015. Facebook is expected to tap in this lucrative market by acting as a platform for the sale of physical goods. This can be made possible owing to the presence of numerous brands and retailers who already have a large presence on Facebook. Social commerce is the next logical step in this value chain as these brands try and sell their products through Facebook itself, given that they would already have a dedicated following of fans who have "liked" their page.
Trefis Forecast Rationale for Page Views per User per Month on Facebook
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${forecast} represents the average number of pages viewed by a Facebook user in a month. This is calculated by dividing total monthly page views on Facebook by the company's average number of users.
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${forecast} has consistently increased as Facebook has gained widespread popularity across the world, increasing from around 450 to almost 500 by 2009. In 2010, monthly page views per user saw a big jump, reaching over 1,100. We believe this steep increase was the result of a number of key product launches, as well as updates to Facebook's page design, which made user navigation much easier.
In February 2010, Facebook launched a new navigation update to its site, which collated notifications, messages and friend requests on a menu at the top of the Facebook page. We believe this update was significant in increasing user engagement, as users found it much easier to track the profiles of their friends, as well as track developments on the groups they had joined.
Additionally, the launch of Open Graph in April 2010 created an extremely useful developer platform, allowing sites/apps to share user information. This enabled external websites to customize their Facebook offerings to specific-user tastes, which significantly increased user stickiness.
In April 2010, Facebook also rolled out a "social plug-in" feature, where external websites could get their own "Like" button for users to signal an affinity towards their brand/website. By September 2010 itself, over 350,000 sites had adopted the "Like" button, and this contributed significantly towards increasing Facebook's presence across external brands and retailers as well.
Monthly page views per user continued to increase in 2011 to around 1,200, driven by further improvements to Facebook's user experience, such as the improved photo uploader/viewer, as well as the "frictionless sharing" concept.
We expect this figure to continue rising in future, although at a diminishing growth rate.
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Trefis considered the following factors for its forecast:
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- Open Graph to Boost Engagement
- After tasting enormous success with social gaming and applications, Facebook is also branching out into other media services to provide a more comprehensive web experience to its user base. This should further be made possible with Facebook's Open Graph, which is a set of API's (Application Programming Interfaces) that other developers can use to build apps and websites that can be shared and viewed on Facebook.
- As an example, in September 2011 during its f8 developers' conference, Facebook launched its music service in partnership with Spotify, Rdio and MOG.
- The company is also in discussions with Vevo to possibly strike a video-ad sharing deal with the latter. This service would also likely be based on Facebook's Open Graph technology, and should enable further high-quality content to appear on users' news feeds.
- Innovative Interfaces
- Facebook has had a history of taking bold steps to change the look and feel of its website. A prime example of this is the Timeline, which was announced in September 2011 and is in process of full implementation in early 2012.
- The Timeline is a unique feature, in the sense that it tracks and consolidates all user information posted on Facebook since he/she joined the site, and presents it in an engaging format.
- We expect future upgrades to the Timeline, as well as further product launches by Facebook to maintain user stickiness at higher levels compared to other social networks.
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- Privacy Concerns Can Hinder Users
- Facebook has been plagued by privacy concerns since its inception. Users have voiced strong opinions over their information being possibly shared without consent.
- One example is Facebook's "frictionless sharing" concept, where a user's consumption behavior is automatically tracked.
- As Facebook tries to increase monetization efforts by pushing for more target-based advertising, these privacy concerns could rise further. This could discourage users to share as much information, and spend as much time on Facebook.
- Google+ Has the Integration Advantage
- Google's homegrown social network Google+, has already been estimated to have hit over 100 million users, with an expected user base of around 400 million by the end of 2012.
- More importantly, Google+ has the advantage of integration with Google's numerous other web services, including YouTube and Google Apps. This could progressively increase user engagement for Google+, as users find it a "one-stop-shop" for their online requirements of entertainment, shopping and networking.
- Social Media Fatigue May Creep In
- According to an August 2011 report by Gartner, a survey conducted on around 6,000 social network users revealed that 24% of the respondents were using their social sites less often than when they signed up.
- This may be coming about as online social media continues to see a boom, leading to users being flooded with an information overload. While we believe this is minor deterrent considering Facebook's ubiquity and popularity, it can lead to a small decline in overall user engagement, atleast in the short term.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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