Facebook Valuation Model - Appears to be spot-on ;)

Facebook Equity Strategy  

Facebook seeks to have the stock price be low so that a consumer ownership model is achieved.  There is not a desire to have institutional ownership.    This allows for a general democratization of equity and is aligned with where the crowdfunding models are evolving to.  This is readily apparent by 420 Million total shares.


Key Metrics

1. Between $35 and $37 a share - valuation of $80 and $96 Billion
2. 420 Million total share being offered given new issue and selloff by investors - 80 Million shares being added
3. 90 - 100x Earnings
4. 1 Billion+ Users - Globally, there are 2 Billion Internet users - Assumed that 20% of the Users are false or duplicated
5. Revenue growth expected to be 35% based upon historicals - 88% from 2010 to 2011 and industry growth
6. Facebook Ads can reach a targeted audience with 95% accuracy compared to a 27% industry average
7. Engagement by users is 8 hours per month
8. Authentic users account for 80% of users with the majority of the fake users either under 14 or choose to not disclose the facts of their demographic profile
9. Business-focused Pages allow for a viral, referral network to an average of 500 fans per business - Trusted referrals will take marketshare from GroupOn and Living Social

Key Initiatives

1. Search within the social network - $10 Billion Marketsizing - 10% marketshare in 2012 - $660 Billion total market spend on advertising globally
2. Analytics package for ads - Social ads micro-targeting - 30-40% more efficient than Google and Bing for B2C channel
3. Ad scale-out and hiring 500 sales and marketing staff - Assuming $10 Million/Sales Person for B2B channel - Based upon current job openings at Facebook - 3.2 Million current SMB pages - Top Age 100 brands on Facebook 
4. Social Gaming - Given the relationship with Zynga and the gamification models that are emerging, an additional $4-$5 Billion will contribute to revenue - Expected revenue contribution to increase to 20% from the current 12% (2011) Zynga revenue contribution - Payment revenue from news and music will not result in significant revenue additions
5. Mobile Display Ads - Expected to generate $2 - 3 B assuming mobile slightly overlaps with desktop Facebook access - 460 Million mobile users as of 3/31/2012  - Expected model will use sponsored story ads in a stream on a mobile device
6. Entry into China in 2013+ and the rest of the BRIC countries 2014+
7. Ad revenue sharing between Microsoft Bing and Skype for Facebook Ads by 2013

An additional $3 Billion in revenue assumed for 2013- Actual revenue for 2013 will be closer to $5B - $6B.  $10 Billion Run-rate given scaleout assumptions in 2 years.

EPS expected to be .42 - .55 for 2013.  2017 is completely unpredictable until 4Q2013. 1 year is needed to predict an accurate EPS.

Using Google and LinkedIn as reference points when those companies went public, Facebook has the potential to grow at 5x revenue by leveraging the expected 1 Billion captive customers.  The average time currently spent on Facebook is measured in hours by comScore.

20% engagement model needed to generate expected revenue. 200 Million users with a spend of about $20 per user would provide $4 Billion in revenue based upon payments (gaming) and advertising click-through.  Corporate ad sponsorships will generate $500 K - $1 Million, on average.

Critical Success Factors

1. In order to achieve the above revenue, Facebook MUST release mobile ads for their application by July, 2013 in order to begin a new revenue ramp model.  Sponsored ads will NOT drive revenue and display ads must be released as a platform addition to tablet and smartphone platforms
2. Embedding ad platform with Instagram into pictures, Microsoft Bing and Skype by 3Q, 2013
3. Developing Search and Analytics for the mobile ad platform by 3Q, 2013

Recommendation

1. Allow 9 - 12 months for the IPO to adjust to the difficult market conditions.  At that point, review the Moving Average (EMA) to evaluate a trend.  Track the above metrics to confirm growth and product plans
2. Buy into Call Options with about a 3 month expiration.  By that time, Facebook will have established a revenue trend
3. There is the risk that Facebook could collapse from a share price perspective but just as Google took time to adjust to being a public company, Facebook will take 1 year+.  Google was different in that there were effectively 3 co-CEO's running the company