A Review Of Facebook’s Roller Coaster Year
The past year was quite eventful for Facebook (NASDAQ:FB) as the company went public in May. Since then, its stock has been on a downtrend except for the recent gains in November and December. In 2012, Facebook crossed 1 billion active users, made its first major acquisition of Instagram for $1 billion and ramped up its mobile monetization efforts. It further reduced its dependence on Zynga’s games by promoting other game developers, faced privacy law sites, entered into the recruitment market, and promoted social commerce.
Going into 2013, the company will focus on further ramping up its mobile advertising and maintaining healthy revenue growth that has reinforced investors’ confidence in recent months. We also expect Facebook to lay greater emphasis on privacy and security of user data as well as pose stronger competition to Google (NASDAQ:GOOG) in terms of bidding for ads.
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See our complete analysis for Facebook
Facebook Went Public, Stock Fell
Facebook went public in May 2012 at an initial price of $38 per share, amounting to a market valuation of $100 billion. There was a lot of criticism going around the IPO price and Facebook’s fundamentals didn’t really justify such pricing. The company could not maintain investor confidence and the subsequent concerns regarding its ability to monetize the mobile platform led to a dramatic slump in its stock. The stock price nearly reached $17.50, before recovering to the mid to high 20s where it stands currently.
Based on Facebook’s disclosed filings, we estimate the company’s ad revenue per page view fell drastically from 47 cents in 2009 to 27 cents in 2010. This sparked a concern that the company is not able to keep up with its user base growth and lacks a viable monetization strategy. That is why even though Facebook surpassed a massive 1 billion active users mark in 2012, it did little for the stock.
The Subsequent Recovery & Mobile Ramp Up
It wasn’t until Q3 2012 results that Facebook infused fresh confidence in investors with impressive results, both overall and within its mobile division. The stock price increased from a little over $19 to close to $26 over the course of just 2-3 weeks, registering an increase of 35%. Accelerated revenue growth and a ramp-up of mobile advertising were the key highlights of the company’s earnings. During this earnings announcement, Facebook’s management also outlined several initiatives that the company was taking and shared its vision for mobile monetization to dispel investors’ concern about its ability to monetize its mobile platform.
In addition, trading activity also contributed to the stock’s recovery. The general expectation was that Facebook’s stock would decline when the new shares that were coming out of the lockup period flood the market, however the opposite happened. It appeared that the employees were not as desperate to dump their shares in the market this time, which echoes with Facebook’s improved business performance. A lot of bears who had taken short positions due to this expectation started covering their positions when the stock didn’t go down, thus fueling the stock rally. Furthermore, several major analyst upgrades for Facebook’s stock, including those by Bernstein Research, BTIG and Piper Jaffray, also fueled the stock.
Acquisitions & Feature Enhancements
Facebook acquired Instagram, a popular mobile photo sharing platform for $1 billion in cash and equity in early 2012. It paid $300 million in cash and 23 million shares of its common stock to close the deal. Facebook intends to leverage Instagram’s growing user base to enhance its own mobile photo offering and drive engagement on its mobile apps, enabling it to capture a larger share of the mobile advertising market, which is expected to be worth $17.6 billion by 2015.
Besides this major acquisition, Facebook made several feature enhancements in 2012 to improve monetization. One of them was reducing its dependence on Zynga and promoting all game developers alike.
Facebook and Zynga have been involved in a complicated but mutually beneficial relationship for quite sometime now. Zynga has leveraged Facebook’s massive user base to build a social gaming empire while Facebook generates a significant amount of revenues through virtual transactions and advertising through Zynga. Zynga accounted for 13% of Facebook’s total revenue in Q1 2011, which decreased to 12% as the year progressed. In 2012, Facebook managed to further reduce its dependence on Zynga. We expect Zynga’s revenue contribution to drop further, which is not a bad thing given that Facebook is seeing substantial growth in revenues from other game developers.
Additionally, Facebook started charging companies for any offers they provided to consumers who liked their official pages on Facebook, tested mobile ad campaign with Wal-Mart by embedding advertisements within the regular Facebook news feed, and introduced a feature called “Nearby” – a location service based on friends’ recommendations, likes and check-ins.
Through these features, the company wants to ensure that its users spend as much time as possible on Facebook, which is essential for growth in its number of page views. This directly ties with ad-related revenues which essentially depends both on ad pricing and the number of views or impressions.
Our price estimate for Facebook stands at $25, implying a discount of about 5% to the market price.