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Investment Overview for Facebook (NASDAQ:FB)
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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
- Facebook's Average Monthly Unique Visitors: We estimate that Facebook's average monthly unique visitors will grow from 980 million in 2012 to close to 2 billion by the end of our forecast period. The availability of Facebook in large markets such as China, where it is currently blocked, and the expansion of Facebook in mobile space will be vital in achieving such growth. There could be as many as 4.2 billion internet users worldwide by the end of our forecast period, suggesting that there may still be 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 2.2 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 monthly active 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
- Revenue per Page View: We expect Facebook's Revenue per Page View (RPM, per thousand views) to increase from around $0.29 in 2012 to over $0.40 by the end of Trefis forecast period. Facebook has taken a few initiatives off late to improve the engagement on its site. These include Timeline, Graph Search, Gifts, seamless integration with third-party content providers, integration of Instagram, Spotify and Netflix. However, competitors such as Google+ could also negatively impact Facebook's user engagement, especially if subscribers find other/better alternatives to connect online. If Facebook's RPM grows to $0.47, a level seen in the year 2009, there could be 10% upside to our price estimate. On the other hand, there could be 10% downside if the figure increases to only about $0.35.
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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 75% to its overall value. This high value contribution can be attributed to two main factors: scale and user engagement. Facebook already has over 1 billion monthly active users and the user engagement within this base is also high, clocking around 1,250 monthly page views for every user. This high engagement is a result of innovative product development at Facebook which includes Timeline, Graph Search and several other features 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 driven by growth in the mobile space.
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
For the last few quarters, Facebook has stepped up its efforts to improve its mobile monetization. The company saw the ad revenue contribution of its mobile platform increase from about 14% in Q3 2012 to 30% in Q1 2013. While this is helping the company sustain revenue growth, margins have shrunk as Facebook is incurring higher costs due to higher headcount and infrastructure related expenses.
Facebook has a tremendous opportunity to leverage its user data to better target advertisements as well as improve and fine tune the current ads. The number of ads within Facebook’s mobile feeds have increased significantly and better effectiveness is also driving the ad pricing up. For instance, the company launched a huge mobile advertising campaign for Wal-Mart during the holiday season and around 50 million ads focusing on deals and discounts were rolled out to millions of Facebook users.
Zynga Direct Might be a Threat to Facebook
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. As Zynga reduces its reliance on Facebook as a platform, the latter could feel some pressure on its share in the global virtual goods market.
Google+ Has Integration Advantages
As of April 2013, Google's homegrown social network Google+ had close to 359 million active users and over 500 million registered users. In terms of scale, Google+ remains the biggest threat to Facebook in the social networking space. Competition from Google+ is likely to increase further given Google's aggressive promotion as well as seamless integration it can achieve with Google's other services like YouTube.
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 $30 billion in 2015. Facebook is expected to tap in this lucrative market by acting as a platform for the sale of physical goods. This can be made possible owing to the presence of numerous brands and retailers who already have a large presence on Facebook. Social commerce is the next logical step in this value chain as these brands try and sell their products through Facebook itself, given that they would already have a dedicated following of fans who have "liked" their page.
Trefis Forecast Rationale for Facebook's Average Monthly Unique Visitors
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${forecast} represents the average number of users who have accessed the Facebook website atleast once a month. This number is taken as an average of Facebook's reported monthly active users (MAU's) for the 4 quarters of the year.
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With time, Facebook has firmly established itself as the preferred site for social networking globally, replacing erstwhile market leaders like MySpace. As a result, Facebook's average monthly active users have increased dramatically during the last few years, reaching around 980 million in 2012 compared to just around 100 million in 2008. We expect the figure to increase going forward, although at a diminishing growth rate.
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Trefis considered the following factors for its forecast:
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- Strong Network Effects
- Facebook has some key attributes that enable it to extend its reach beyond its own website.
- Two prime examples are the "Like" and "Share" features. A host of other websites and online publishers have realized the simplicity and effectiveness of the "Like" button, and use this to their own advantage by integrating their content with Facebook. As of May 2013, Facebook was generating 4.5 billion 'Likes' per day.
- This turns out to be a win-win situation. The content-providing website gets to become much more social, reaching out to a bigger audience. At the same time, as Facebook's content partners keep increasing, the company continues to enjoy the free marketing and promotion that comes with it. This chain reaction has enabled Facebook to garner very high subscriber growth over the last few years.
- Facebook on Mobile
- As of Dec 31 2012, Facebook's mobile MAU (monthly active users) stood at 680 million accounting for more than 60% of total MAU. As smartphone and tablet shipments continue to grow, especially in emerging markets, Facebook's user base growth could see strong support.
- Innovative Interfaces & Features
- 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 has been fully implemented. The Timeline is a unique feature as it tracks and consolidates all user information posted on Facebook and presents it in a structured format.
- In early 2013, Facebook unveiled 'Graph Search' which it expects to become one of the key features of its business in the future. Graph Search is essentially a structured way of displaying what your friends like. Users can only search the information that they already have access to. Graph Search has a social element to it and Facebook is banking on the idea that its users will value the results based on their friends’ recommendations.
- We expect more future upgrades and feature enhancements by Facebook to provide incentive to users to join the website, placing it a higher pecking order as 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.
- Facebook faces ban in some countries
- Facebook has faced issues in the past with some countries banning it completely. This has primarily happened in countries where governments want to have strict control over the flow of online information. This includes China and Pakistan. While the banned order in Pakistan was later revoked, further bans on Facebook, especially in emerging markets, could directly hinder the company's subscriber growth.
- Facebook could face similar troubles in India as the company, along with Google, is facing legal issues over web censorship.
- Competition from Google+
- As of April 2013, Google's homegrown social network Google+ had close to 359 million active users and over 500 million registered users. In terms of scale, Google+ remains the biggest threat to Facebook in the social networking space. Competition from Google+ is likely to increase further given Google's aggressive promotion as well as seamless integration it can achieve with Google's other services like YouTube.
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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