The Henry Fund Henry B. Tippie College of Business Cooper LaRue [[email protected]]
Facebook Inc. (FB) March 12, 2020 Communication Services- Digital Advertising Stock Rating Buy Investment Thesis Target Price $250-260 Henry Fund DCF $254 Facebook Inc. has a dominating global presence that connects people around Henry Fund DDM $143 the world through photos, videos and content. Facebooks Inc.’s ability to add Relative Multiple $270 value through cross-channel coordination and invest in future technologies Price Data will have a major role in their long-term growth. In the short term, continued Current Price $185.27 revenue growth will come from the Asia-Pacific market and digital advertising spending increasing globally. This has led us to a revenue CAGR 52wk Range $159.28 – 224.20 forecast of 14.46% over the next 3 years. Our analysis supports a valuation Consensus 1yr Target $246.78 of $250-260 per share. This implies 35%-40% upside. Given this analysis, we Key Statistics recommend a BUY on Facebook Inc. Market Cap (B) $527.82 Shares Outstanding (M) 2,405 Drivers of Thesis Institutional Ownership 83.88% • Facebook Inc. has a defensible moat of 2.26 billion daily active users Five Year Beta 1.20 worldwide which is 7x that of Twitter, the second largest social media Dividend Yield 0% platform in the world Est. 5yr Growth 13.2% • We forecast 27% revenue growth for the Asia-Pacific market in 2020 and Price/Earnings (TTM) 21.62 the region presents a great opportunity for further expansion Price/Earnings (FY1) 20.29 • Aggressive investors in future technologies such as artificial intelligence, Price/Sales (TTM) 7.48 virtual reality, and cryptocurrency. Along with a very active M&A team Price/Book (mrq) 4.23 who knows how to add value through acquisitions in new platforms Profitability • Global marketing spending is expected to increase from 51.45% to 54.4% in 2020 with much of spending going into social media platforms like Operating Margin 43.66% Facebook and Instagram10 Profit Margin 26.15% Risks to Thesis Return on Assets (TTM) 16.02% • Saturated North America and European markets have limited potential Return on Equity (TTM) 18.88% for further user growth, we estimate just 2-3% user growth going forward FB GOOG Industry • Changes in regulatory environment could hinder Facebook Inc.’s ability 30 Yahoo Finance to collect user data and therefore run effective advertisement campaigns 25 28.4 27.4 • Currently heavily concentrated in one type of revenue source, 98.5% of 20 23.7 1 21.6 revenue comes from digital advertising 20.0 18.7 19.1 19.6 Earnings Estimates 15 18.1 Year 2017 2018 2019 2020E 2021E 2022E 10 Adj. EPS $6.16 $7.57 $8.55 $9.64 $11.14 $12.73 5 Growth 76.5% 22.89% 12.95% 12.75% 15.56% 14.27% 0 Consensus $6.16 $7.57 $8.55 $9.54 $11.45 $12.80 P/E ROE EV/EBITDA EPS 12 Month Performance Company Description FB S&P 500 30% Facebook Inc. is a social media company that connects family and friends through the ability to share photos, videos and content online. 20% Facebook Inc.’s platforms currently engage with 2.26 billion people daily across the globe1. 10% Facebook Inc.’s revenue is 98.5% derived from advertisement revenue through their social media 0% platforms which are Facebook, Instagram, WhatsApp, and Messenger. Facebook Inc. also -10% owns Oculus which is a virtual reality gaming brand. M A M J J A S O N D J F Yahoo Finance Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY advertising revenue with 98.5% of Facebook Inc.’s revenue coming from digital advertising1. Facebook Inc. does not Facebook Inc. is the most recognizable social media break down their revenues any further by platform but platform in the world with 2.26 billion daily active users below you can see regional revenue. across their four platforms. Facebook Inc.’s social media platforms include Facebook Messenger, Instagram and WhatsApp. Together these create the largest network of Facebook Revenue by Region people on earth. Whose user base is 7x that of Twitter— 8.80% the social media platform with the second most users.
Facebook Inc. has performed extremely well over the past 21.80% 2 five years with an average revenue CAGR of 41.8% . While 45.60% we expect this growth to slow as developed markets become saturated, we believe Facebook Inc.’s value warrants a higher stock price. They have proven their ability to monetize platforms like no other social media company and we expect that to continue. 23.80%
Facebook Inc.’s massive user base creates a moat around North America Europe Asia-Pacific Other them that is very defensible and easy to continue scaling. Facebook Inc. has strong growth opportunities in Source: Facebook Inc. 10K developing regions such as the Asian-Pacific countries and around the world. We have analyzed Facebook Inc. using Facebook four different valuation models and have come to the recommendation of a buy with a price target of $250-$260 Facebook Inc.’s largest and most recognizable platform is per share which implies a move of 35%-40% in the next by far its staple product Facebook. Facebook as a platform twelve months. It is especially attractive now after a 15% has 1.66 billion daily active users and 2.5 billion monthly pullback due to the coronavirus which is yet to have any active users1. This is a 9% user growth over 2018 and we material impacts on Facebook Inc.’s revenue and could expect the growth to continue but at a slowing rate. We potentially be a positive as people stay home more. In this project user growth of Facebook to be 7% in 2020 and report we have provided our thought process on the main gradually decline down to just 2% in our forecasted drivers of our models which are user growth, revenue per continuing value year in 2029. user growth, key operating expenses, stock repurchases forecasts and other economic variables. While the Facebook platform has previously been the key driver of growth, we believe it will not be the key driver COMPANY DESCRIPTION going forward. It will continue to be the staple product people know and love, but it has saturated all developed Facebook Inc. is a social media company who connects markets and will essentially continue to be a stable cash billion of users each day through their four main platforms cow going forward. and communication tools. Their four platforms are Facebook Messenger, Instagram and WhatsApp. Facebook Messenger Inc. also has a virtual reality gaming console called Oculus which was first released in 2016. Facebook Inc. operates Messenger is the communications platform Facebook Inc. all over the world with users in every country in the world developed which allows users to text, call and video chat on at least one of their platforms. with other users. The platform originally launched as a stand-alone app in 2011 but today it’s generally Facebook Inc. derives revenue from all regions of the recognized as an extension of the Facebook platform. Just world with 45.6% in the U.S. & Canada, 23.8% in Europe starting this year, new Messenger users are required to and 21.8% in the Asia-Pacific region with the rest spread login using their Facebook credentials whereas previously throughout the world. This revenue is heavily relent on
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it was possible to be a Messenger user and not a Facebook the U.S. In the U.S. people who utilize this type of platform one. are already using Messenger. These two platforms both have room to grow, just in their perspective markets. Each month 1.3 billion people use Messenger as a platform Messenger is primarily used in the U.S. & Canada and to communicate with friends and family. The vast majority WhatsApp is used elsewhere internationally. of these people are also Facebook users, so we expect user growth for Messenger to be consistent with Facebook’s Facebook, Inc. Monthly Active Users by platform growth. Platform (in millions) 2,500 Instagram 2,000 Instagram is a social media platform Facebook Inc. acquired in 2012 for $1 billion dollars. At the time was a 1,500 huge price tag for a company with only 13 employees but today Instagram has grown to 1 billion monthly active 1,000 users, 500 million daily active users and holds an estimated 500 value of $100 billion for its platform3. 0 We see Instagram as a key driver of revenue going forward as its reach is not as global as Facebook’s is but can be one Facebook WhatsApp Instagram Messenger day. In recent years we have also seen Instagram adding features like filters, stories and updating its platform to Sources: 1,3 & 6 in references meet user preferences. This innovation gives us confidence Instagram will continue to add users and The graph above shows our best estimates for how many tangentially drive revenue. monthly active users are on each platform. Facebook Inc. does not disclose this data but we have aggregated WhatsApp estimates from a variety of cites to get a close estimate for reference. WhatsApp is Facebook Inc.’s least recognized platform by people in the U.S. but it has a very strong international Oculus VR presence. The platform is very similar to Messenger in that it allows users to text, call, video chat and more through Oculus is a virtual reality console Facebook Inc. acquired in an online app. It was acquired in February 2014 for $19.6 March 2014 for $2.3 billion. Just one month after its billion which was by far their largest acquisition Facebook acquisition of WhatsApp. Unlike the acquisitions on Inc. has ever made to date5. Instagram and WhatsApp, Oculus does not appear to be paying off. Last year Facebook Inc. sold roughly 400,000 While relatively unused in the U.S., WhatsApp is a very units of their Oculus gear which lags its competitors such common form of communication in nearly every other as PlayStation VR7. We believe virtual reality gaming will country in the world. It currently has 500 million daily become a large industry in the future, but not in the next active users and 1.5 billion monthly active users in 180 few years, and therefore did not forecast any considerable countries6. We expect continuing growth in WhatsApp growth for this product segment. However, with that being users and we believe Facebook Inc. will get better at said, if Oculus is able to establish itself in the emerging VR monetizing its users to drive revenue. WhatsApp and market it could be an unexpected catalyst for growth. We Messenger are similar in that they are communication also think it could be appropriate for Facebook Inc. to sell tools, not social media platforms. This makes them much off this business segment to a more suitable company like less lucrative to monetize as there is no easy way to Microsoft or Sony. engage with users consistently without turning them off to the platform. Capital Structure
It is important to realize that while WhatsApp is very Facebook Inc. has a relatively uncommon capital structure popular internationally, it is unlikely to ever see growth in in that they have no long-term debt. They have never
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issued public debt or taken any privately. Their only long- Facebook Inc. has just recently announced that after a term “debt” would be their operating leases which were tremendous amount of push back from legislators, Libra $9.5 billion in 20191. This is impressive for a company who will be backed by an existing currency such as the U.S. has been growing so fast to not have used leverage in Dollar, Euro, or potentially a precious metal commodity. doing so. Facebook Inc.’s capital structure is below. We do not think Libra will be any substantial part of the revenue of Facebook Inc. in the foreseeable future and Facebook Inc. 2019 Capital Structure therefore did not forecast any revenue from it in our model. However, this extra cost for development does 5.50% lead us to believe research and development expenses will rise as a percentage of sales in the future. We do not think this expense is wasted as Libra may not produce tangible revenue in the near term, it can still create firm value through stock price appreciation due to investor speculation and enthusiasm. 94.50% Virtual Gaming
Debt Equity Facebook Inc. has been trying to make the move into the gaming industry for a few years since they released their virtual reality set Oculus back in 2016. Facebook Inc.’s Facebook Inc. 10k Oculus gear has not done very well but neither has any other virtual reality gaming sets. We believe this is due to limited game selection and development in the space. The RECENT DEVELOPMENTS technology is not quite developed enough to make great games users would play for hours straight. The top gaming Facebook Inc. has begun positioning itself to become a studios such as Activision Blizzard, Electronic Arts and more diversified company rather than having nearly all its Take-Two Interactive also have made very limited revenue come from advertising. Facebook Inc. realized investment in games for these devices leading to the poor they will be unable to continue to grow their top line game selection. VR sets are also relatively expensive at advertising revenue forever at a healthy rate, so they are $400 to $600 each. Oculus currently sells on the low end looking to other streams of revenue. On their last earning of that spectrum at $400. Still $100 more than an Xbox call from January 30th Facebook Inc. doubled down on One. some new industries they are pursuing which we believe will be a positive for them going forward. They have been In recent months Facebook Inc. has acquired three making acquisitions to further develop their virtual gaming companies to help them create more content for Oculus. content, online marketplace, wearables and their unicorn They have acquired Sanzaru Games, PlayGiga and Beat 8 project Libra. Games since last November . These companies were integrated directly into the Oculus team to help create Libra content and games to be used on the Oculus gear. We are still unclear on who the winner of the virtual reality gaming Libra is a digital currency Facebook Inc. has had in the industry will be if any. There is stiff competition with Sony works for a few years but has not officially launched yet. and Microsoft who are industry giants in the gaming The plan was originally to create Libra as its own currency industry, but this could also be a division of Facebook Inc. not backed by any tangible asset, just like Bitcoin, and to we could see them selling off in the future. We believe the use it more between businesses rather than individuals. VR craze ended in 2018 and will not be back until the main Facebook Inc. realized the current cryptocurrency production studios start producing captivating games. technology is revolutionary, but it lacked the transparency and structure needed for a digital currency to be widely used and accepted.
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Recent Acquisitions We believe that Facebook Inc. is in a tough spot on earnings calls because they have the curse of their own As most technology companies are, Facebook Inc. actively success. Historically Facebook Inc. has beat expectations acquires other companies it thinks can provide value. by 20, 30, 50 percent routinely, but they are not able to Recent acquisitions have been aimed at helping Facebook pull those types of beats anymore. Their business is much Inc.’s Oculus, Libra, Facebook Marketplace and even new more developed now and with quarterly revenue of $21 segments such as wearables. Below is the list off all major billion is difficult to beat by any surprising amount. recent Facebook Inc. acquisitions. Facebook Inc. does not disclose what they paid for each of these companies. INDUSTRY TRENDS
Company Date Industry Throughout the entirety of advertisement history ads have Sanzaru February 2020 Virtual Reality become more effective through personalization. Facebook PlayGiga December 2019 Virtual Reality Inc. is continuing to make developments on targeting consumers through demographic, behavioral and location- Beat Games November 2019 Virtual Reality based advertisements. As the industry matures in Packagd September 2019 Online Retail developed counties like the U.S., companies like Alphabet, CTRL-labs September 2019 Wearables Facebook Inc., Microsoft and Amazon have developed Chainspace February 2019 Blockchain more effective methods to target consumers that are Source: TechWyse more personalized than ever. We believe Facebook Inc. is well positioned within the industry to outperform its peers We believe Facebook Inc.’s ability to add value through over advertising revenue because it has the user base and acquisitions will help them grow in the future just as the platforms to effectively run any kind of advertising WhatsApp and Instagram contribute to current growth. campaign. COVID-19 Demographic Marketing The U.S. has experienced steady growth over the past few years and while we expect a slight economic slowdown in Historically demographic marketing has been the most 2020 due to the Coronavirus, we do not think it will common type of targeted advertising, but it is becoming materially change the underlying valuation of Facebook less and less popular due to its “one size fits all” Inc. While Facebook Inc. does tend to move with the mentality. Today companies are able to easily retrieve market, it does not have the same risks of disrupted supply behavioral and locational data on their consumers and use chains many other companies have. This protects their that data to pinpoint its most noteworthy prospects. revenue from short term negative effects but will affect Demographics are a good place for many advertisers to them if companies who advertise on their platforms feel start but then they need to identify their subset customer the effects enough that they start cutting marketing within that criteria using other methods. This was once the expenses. most common way Facebook would target customers as they had that basic personal information, but this is not very common anymore due to new and more effective Q4 2019 Earnings methods such as behavioral marketing. We do not see this as a method Facebook Inc. will be able to use to drive In the last quarter of 2019, Facebook Inc.’s revenue was advertisement revenue as they have historically. $21.08B which beat analyst’s expectations by 0.09% and EPS came in at $2.56 which beat expectations by 3 cents8. User metrics reported are monthly active users and daily Behavioral Marketing active users which both slightly beat expectations. Despite the positive news, Facebook Inc.’s stock was down 7% on Behavioral marketing tracks consumers’ interests and the day. This was partially due to a market wide selloff preferences through one’s interactions with the internet. which tracked the S&P 500 down 3% on the day but the Most commonly through social media and internet delta may be contributable to Facebook Inc.’s earnings searches. It recognizes what users like and then call. recommends similar products or services. This method of
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targeting has become most common because companies Social Media Spending have gotten better at collect and analyzing users’ habits online often without them knowing. It has been shown to Companies are becoming more active on social media produce more effective results than basic demographic every year. It is a great way for them to continuously marketing, but not as effective as location based. connect with their current customers and a way to reach out to potential new ones. Advertisement spending on Location Based Marketing social media platforms reflects this. In 2019, advertisement spending was up 26.5% YOY to $35.67 One of the newest and still transforming advertising billion. Below is a graph showing Blomberg’s outlook methods is using consumers’ locations to provide them pertaining social media spending. with local deals or suggest items others in their area have used. As locational data has become easier for companies Social Media Spending Outlook (In Millions) to obtain it has allowed companies to more effectively personalize advertisements to one’s preferences. Coca- $70,000 Cola for example uses artificial intelligence to understand $60,000 how its brand and products are being interacted with on $50,000 social media to then target customers in those areas. They $40,000 then use this data to advertise different drinks and flavors based on the interactions through communication $30,000 platforms like Facebook, Twitter and Instagram and then $20,000 uses those platforms to display advertisements9. $10,000 $0 Location based marketing is the fastest growing method of 2016 2017 2018 2019 2020 2021 2022 2023 2024 targeting consumers. Facebook Inc. is well positioned in this niche as most users are likely to either check Facebook Desktop Mobile or Instagram while they are out shopping, eating or at a show. Below is graph showing the estimated outlook of Source: Bloomberg spending towards location-based advertisements in the U.S. As desktop spending declines, mobile is expected to grow rapidly. Spending on social media represented 27.8% of all digital advertisement spending which is the second largest U.S. Location Targeted Spending category behind search10. (in billions) We believe this changing in user preference from desktop $40 to mobile is partly due to people using Facebook Inc.’s platforms more. In 2019, the average social media user $30 spent 2 hours and 23 minutes on just social media platforms. Of that, 58 minutes were one Facebook and $20 another 53 minutes were on Instagram11. That is 77% of all the time one spends on social media going to one of $10 Facebook Inc.’s platforms. This change in user preferences has led to increased revenue for Facebook Inc. as the $0 advertising dollars follow the eyes. 2017 2018 2019 2020 2021 2022 Cross-Channel Coordination Source: eMarketer Cross-channel coordination is how companies are able to integrate a particular advertising campaign across multiple platforms tangentially to better target consumers. Social platforms are getting better at recognizing what users are
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looking at on one platform and then able to target advertisements for similar products/services on another platform. We believe Facebook Inc. who owns multiple social platforms is positioned to do well in this advertisement dimension. Facebook Inc. can see what users are viewing on Facebook and then use that data to target them with similar advertisements on Instagram. Similarly, Google can do this with YouTube. We believe this gives these companies an advantage in the space over other social platforms like Twitter or Microsoft who just have one social platform. MARKETS AND COMPETITION
Facebook Inc. faces heavy competition from its main competitors which are Google, Amazon, Microsoft and Alibaba. Including Facebook Inc., these companies account for 82.4% of global digital advertisement revenue and those top companies are expected to gain an even higher percentage of market share going forward. In this industry the network effect is these companies’ biggest asset. It is Source: eMarketer very difficult for a new competitor to get enough users and In U.S. markets we predict the big four; Google, Facebook collect enough data to make their internal digital Inc., Amazon and Microsoft will continue to slowly eat advertising business better than the current dominators. away at their smaller competition slowly. Advertisement This is what creates a moat around Facebook Inc.’s social revenue as a whole is slowly transitioning towards online media platform, but their competitors gather data in other and we will see these additional dollars predominately go ways that are also effective. to these four companies. Within those four we believe Below is an infographic showing the relative breakdown of Google and Facebook Inc. will continue to grow at a faster revenue across the top ten companies. Other global digital rate than Amazon and Microsoft. advertisers include Baidu and Tencent but I have decided We see Facebook Inc. as the market dominator in social not to include them as direct competitors because those media as they are able to use both Facebook and two companies derive most their revenue from China. Instagram to market cross platform to consumers. This is Facebook Inc. does not compete in China because very attractive for companies looking to advertise on social Facebook and Instagram are illegal there. Alibaba also platforms. Facebook Inc. is also well positioned to collect derives most of its revenue from China but we believe substantial amounts of data on its users and monetize Alibaba is best positioned to pose a threat to U.S. what brands users are interacting with the most. companies as they have some U.S. customers and they are much larger than Baidu and more diversified than Tencent. Peer Comparisons
We have identified Facebook Inc.’s four main competitors to compare Facebook’s positioning and valuation in the market too. In the digital advertising space, we believe Facebook Inc. and Google are best positioned to continue to dominate the space. Google is poised to do very well in search and Facebook Inc. is poised to do well on its social media platforms. In the chart below you can see how Facebook Inc. and Google are also heavily dependent on advertising revenue compared to their peers.
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Percentage of Company Revenue Revenue by Region
from Advertiseing 100% 98% 100% 83% 80% 80% 60% 53% 60% 40% 40% 20% 20% 12% 4% 0% 0% FB GOOGL AMZN MSFT BABA FB GOOGL AMZN MSFT BABA North America Europe Asia Other
Sources: 18-21 in references Sources: 18-21 in references While we do believe Amazon and Microsoft will perform well in the future, it will not be due to taking advertising Relative valuations are heavily based on common revenue from Facebook Inc. and Google. Advertising valuation rations. When looking at Facebook Inc.’s forward revenue is a relatively very small part of both Amazon’s P/E you can see that Facebook Inc. is slightly underpriced and Microsoft’s revenue and they do not have the social compared to its competitors. We believe this is because its platforms to be able to reach as many people on a competitors have divisions other than digital advertising consistent basis as Facebook Inc. Microsoft owns LinkedIn, that analysts are projecting to grow at a faster rate. which is becoming increasingly popular, but we believe Facebook Inc.’s EV/EBITDA is also the lowest of its they will continue to keep that platform as more of a competitors which we believe should be higher based on professional medium and cluttering it with advertisements our earnings forecasts. Facebook Inc. also has a very would change the feel of it drastically. Microsoft also owns healthy profit margin which has been relatively stable the the search engine Bing which executes a very small past three years. percentage of global searches but was up 16% in 201920. Market Cap Forward EV/EBIT Profit Internationally Facebook Inc.’s main competitor is Alibaba Ticker (billion) P/E DA Margin which operates all throughout Asia. This is a key market FB 599 19.26 18.680 26.15% Facebook Inc. would love to be more exposed to but GOOGL 1020 23.69 19.050 21.22% currently cannot as Facebook is banned in China. This is where Alibaba gets most of their advertising revenue from. AMZN 1040 52.14 29.450 4.13% We do not expect China’s Facebook ban to go away and MSFT 1360 28.35 21.400 33.02% did not project any future revenue in the case of that BABA 580 31.22 28.100 35.21% possibility but if one day China changes their law it would Source: FactSet be a huge market for Facebook Inc. Below you can see the regional breakdown for Facebook Inc. along with its peers. ECONOMIC OUTLOOK
Facebook’s revenue, which comes from almost all advertising, strongly correlates to how the country is doing as a whole. When consumers have money to spend advertisers target those consumers and those sales lead to a growing economy. If people are not spending, companies have less money to advertise and the industry will also slow.
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GDP Outlook then cause more spending and therefore slightly raise inflation. This would have negative effects of Facebook Inc. In the U.S. we have experienced steady GDP growth over as employee wages would tangentially increase. Salaries the last few years and we expect that to continue into and wages are approximately 12% of revenue for 2020. In 2019 U.S. GDP grew 2.33% which was a slight Facebook Inc. and has been on the rise due to hiring more slowdown from 2018’s 2.93%14. Below is a chart showing people to try to sift through inappropriate content. the annual GDP growth rates going back to 2015. We have also included poor projected 2020 GDP growth at 1.75% Consumer Confidence
We believe consumer confidence is one of the top indicators to watch in relation to how the digital advertising industry will do in 2020. Companies spend GDP 2020 Forecast more money on advertising through Facebook Inc. when 3.50% consumer confidence is high to drive sales in optimistic 3.00% 2.90% 2.93% times. If this outlook changes and people stop spending as much, companies will also cut back their spending on 2.50% 2.33% advertisements. 2.37% 2.00% Throughout 2019 consumer confidence has held near all- 1.50% 1.75% time highs and we do not expect this to continue. Heading 1.63% 1.00% into the election we expect consumer confidence to 2015 2016 2017 2018 2019 2020E decrease back historical averages. While we do not see this to have a major impact on GDP or the digital Source: FRED advertising industry in 2020, we do think it a leading indicator for a potential downturn in 2021. Going forward we believe GDP will dip to 1.25%-1.5% growth in Q2 due to Coronavirus disrupting supply chains CATALYSTS FOR GROWTH and fear it will spread to the U.S. but will rebound in the latter part of the year supported by historically low As companies do better in a growing economy, we expect unemployment, low inflation, strong consumer confidence them to continue to spend a large amount of their and market friendly monetary policy. marketing budgets on digital advertising. Especially running advertisements through Facebook Inc., Google, We do not think Coronavirus will have a negative effect on Amazon and other traffic heavy platforms. We also Q1 GDP but will in Q2 once companies have depleted their continue to see increasing screen time, rapid growth excess inventory and their supply chains are then at a internationally and in 2020 we have one large cyclical bottleneck. However, after Q2 we believe the virus will driver of advertisement spending, the election. subside over the summer and we will then report strong numbers in Q3 and Q4 of 2020. This will not have a Political Advertisement large material impact on Facebook Inc.’s revenue or earnings unless this effects company’s spending money on In election years, billions of dollars are spent through a marketing. wide range of mediums and digital platforms will account for a large percentage of that. Political advertisers are Inflation expected to spend about $10 billion on their campaigns in 2020. This is a 57% increase over the last primary election Inflation has been slowly creeping up since 2015 as low in 201612. We believe much of that will be used through rates and an increased money supply have people digital mediums to target as many potential supporters as spending more. In 2019 average inflation came in at 2.3% possible. It is also an effective strategy to connect with which is in line with the fed’s target15. We believe this will young voters. increase to 2.4% in 2020 as companies struggling to find qualified workers will raise wages to attract talent. This will
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Historically most political advertisements have been broadcasted through television. We believe this year a larger percentage of campaign dollars will be used on social media and other digital platforms. According to Facebook Inc., 85% of U.S. presidential campaign advertisements have targets to reach at least 250,000 Americans13. We believe Facebook is the best platform for campaigns to use and they will gravitate towards it with their campaign dollars. Facebook Inc. has recently come under social pressure for refusing to fact check political ads which does have social repercussions, but it should help them grow political advertising revenue.
Other platforms have taken a tougher stance on the issue with Twitter banning all individual campaigning advertisements and Google deciding to restrict some Source: eMarketer content as well. We do think these platforms should do their best to stop the spread of political misinformation As expected, advertising dollars are transitioning with the but it’s not that easy. Mark Zuckerberg says they do not users to be spent more on mobile, rather than traditional feel comfortable being responsible for interpreting the mediums, such as T.V. This is another positive for digital first amendment and therefore they are leaving it up to advertisers who can keep the attention of their users users to decide if content is credible on their own. longer. Even as companies like Apple and Google have Facebook Inc. has taken this stance as it does not want to introduced tools to help users become more aware of their open itself up to potential lawsuits. We understand the time spent on mobile, with aim of helping users limit their reasoning behind this decision but do have concerns about own usage. No real change has been seen in the user the social repercussions that may follow. population.
Increasing User Screen Time International Growth While the North American and European markets have In recent years we have seen a dramatic transition of become saturated, growth will need to stem from user’s eyes from the T.V. to their phones and computers. emerging markets. In the past three years Facebook Inc.’s In 2019 digital advertisement accounted for 51.45% of revenue growth from the Asia-Pacific region has grown by global advertisement spending and it is expected to 27%-51% each year. Going forward we are forecasting a increase to 54.4% in 202010. This is a strong proponent of 27% increase in 2020 and then that growth slowly growth within the digital advertising space. Online declining to 2.5% in our continuing value forecasting platforms are in a competitive battle with T.V. content for period in 2029. This growth will be driven by an increase in views, and as far as time spent is concerned, mobile devices available and the quickly growing economies of platforms are winning. We believe this transition is many countries in the Asia-Pacific region. Below you can especially noteworthy as most of non-digital advertising is see our revenue growth forecast for each region. spent through television. In this chart you can see how while the U.S. & Canada and European regions have seen healthy growth historically. We believe these markets are saturated and will continue to see growth but at a significantly slower rate than historically. In the Asia-Pacific and Other regions we forecast their growth to also slow over time but stay very strong for the coming years.
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companies have adjusted their platforms to comply with Yearly Revenue Growth Projection California, therefore they are the same in all states. 60.00% Facebook Inc. for example has recently been in the hot 50.00% seat for selling private information to Cambridge Analytica 40.00% resulting in a $5 billion dollar fine to Facebook Inc. This was by far the largest fine ever imposed on a company by 30.00% the Federal Trade Commission. Facebook Inc. may still not 20.00% be out of the woods when it comes to its knowledge of private information. In January, Facebook Inc. also settled 10.00% to pay $550 million dollars to the state of Illinois for 0.00% breaching biometric privacy laws. Lawsuits have become somewhat normalized as most social media companies are frequently involved in them. We think this will push legislators to make more radical policy’s in the future to US & Canada Europe protect user data. Asia-Pacific Rest of World Internationally, the European Union has much stricter laws, which makes it harder for digital advertisement companies to collect and make money off user data. The HEADWINDS FOR GROWTH EU has somewhat been ahead of the U.S. in this sense and we expect the U.S. to follow suit soon. Regulation Cyber Hacking Regulation in the digital advertising industry is currently fairly limited as governments for one, don’t fully Any company that is collecting and storing private user understand how companies like Facebook Inc., Google, data will have hackers attempting to obtain that data. Amazon and others collect and use personal data. Also, the While this is most common among medical networks, industry is changing so fast it is hard for the government companies who create revenue through digital advertising to keep up with these companies. Companies are moving are also susceptible because they use valuable user data forward with projects and tactics that have not been to create effective advertisements. We fear that a large- brought to the attention of regulators yet and scale theft of information from Facebook Inc. could therefore are not illegal but are a concern for many damage their reputation and stunt growth. If the data users. In the U.S. federal government there has not been a breach was bad enough, there could also be a significant major change in digital legislation since the Children’s loss in users who delete their accounts. We think this is Online Privacy Act in 2012 which protects children’s data unlikely though as we think most people have become who are under 13. However, there have been some state desensitized to data breaches. Many people assume these restrictions on social media companies pertaining to companies such as Facebook Inc., Google, and Amazon collecting user data. States such as California and Illinois already know everything about them anyway and do not have passed state regulation to protect their residents. worry much about it.
The California Consumer Privacy Act which went into REVENUE DRIVERS effect January 1, 2020 hopes to create more transparency between users and the platforms they interact with. It Facebook Inc. is an international company who derives it’s requires platforms to ask users permission to use their revenue from all over the globe. It primarily collects data and requires that companies immediately report any advertising revenue from its Facebook, Instagram, 17 WhatsApp and Messenger platforms which make up data breach of their system, no matter how small . This 1 California law effectively also applies to all states as these 98.5% of total revenue . Currently 45.6% of revenue is in North America, 23.8% is in Europe, 21.8% is in the Asia-
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Pacific region and the remaining is spread throughout the risen 35% year over year since 2014 and is just starting to world1. decline1. Going forward we have projected this growth rate to drastically decline to 8% for the next two years and This strong international presence diversifies their then gradually declining to a steady state of 1% in revenue so it is not concentrated in one geographical continuing value which we believe is very conservative. location and provides room for growth in many growing markets. In each of these locations the revenue per user Europe (RPU) widely varies as users in more developed locations like North America and Europe create substantially more Europe is the other comparable region to the U.S. and revenue than users in the Asian-Pacific countries. Canada which were assigned very similar growth rates as above. However, it is noteworthy that the revenue per European user is roughly 1/3 of that in the U.S. and Facebook Revenue by Region Canada. This is due three main reasons. 8.80% One, while these are still monthly active users, Europeans do not spend as much time on Facebook Inc.’s platforms 21.80% as Americans do. A monthly active user is anyone who has 45.60% logged into either Facebook, Instagram, WhatsApp or Messenger just once in the last month. This leaves open a wide range on how much those people use their platforms in that month.
23.80% The second is the platforms Europeans primarily use. While Facebook Inc. does not provide the user data or North America Europe Asia-Pacific Other revenue split out by platform, we know Europeans use WhatsApp a lot whereas Americans hardly use it at all. WhatsApp has approximately 1.5 billion DAU but the Source: Facebook Inc. 10k revenue from this platform’s users are much less than This wide variance in user growth by region and revenue social media platforms like Facebook and Instagram. per user Facebook Inc. generates makes it ineffective to WhatsApp is much less lucrative to monetize as it is estimate advertising revenue just as one global number. In primarily just used at a personal messaging platform. our model we forecasted the number of monthly active There are not near as many opportunities to place users and revenue per monthly active user by location to advertisings and the app is also free to use. These two calculate the revenue per region separately and then bring reasons are why we see the major difference between the them together at the end for a total estimate. This is so we revenue generated from a U.S. & Canada user vs a could take into effect the changing growth rates by region European one. and account for the differences in revenue per user. The third and likely most impactful reason is the stricter EU laws and regulations on Facebook Inc. and others U.S. & Canada pertaining to gathering and using user data. The EU has The key countries that have the largest impact to Facebook stricter privacy laws which make Facebook Inc.’s Inc. are the U.S. and Canada. While in previous years this competitive advantage diminishes. These restrictions region has seen steady 3%-5% growth, we estimate going hinder Facebook Inc.’s ability to run effective marketing forward it will only grow by 2% a year until 2029 and then campaigns for its advertisers. it drops to 1.5% as the U.S. and Canada are nearly fully The graph below shows the average revenue per monthly saturated. This 1.5% growth is essentially just accounting active user Facebook Inc. generates by region. for population growth which is about .5%-1% per year and assuming slight net user growth2. The other key component to revenue is how much revenue they can generate per user. In recent years the revenue per user has
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Operating Expenses Revenue Per Monthly Active User The first and most important component of each of these $8.74 models is revenue which is explained above in the revenue decomposition. After that, the operating assumptions play $12.36 a key role in your ending share price. We have estimated $44.14 Facebook Inc.’s operating expenses by taking a 3-year $139.35 historical average of percentage of revenue for each line item as a baseline and then made adjustments $- $25.00 $50.00 $75.00 $100.00 $125.00 $150.00 accordingly. We believe this baseline is appropriate given Rest of World Asia-Pacific Europe US & Canada Facebook Inc.’s rapid growth recently. In 2016, Facebook Inc.’s revenue was $27.9 billion and in 2019 revenue was $70.7 billion1. Since this time operating expenses have also Source: Bloomberg shifted just as revenue has which is why we used a 3-year baseline to forecast from. The main accounts we adjusted Asia-Pacific & Other to be a different percentage of sales than historical are We have estimated the Asian-Pacific regions and rest of research and development and general and world will grow at a similar rate in terms of user growth administrative. Below is a chart showing the 3-year and revenue per user. For these regions we have historical and 3-year forecast of operating expenses estimated roughly a 10% growth in new users in 2020 assumptions. which slows to 1.5% in the continuing value year and revenue per user growth of roughly 17% per year which Operating Expenses as % of Revenue decreases down to 1% in the 2029 estimate. When you 25.00% combine 10% user growth and 17% revenue per user 20.00% growth, we forecast a 27% increase in revenue in 2020. 15.00% These regions have seen high growth in recent years and we expect that to continue but at a slowing rate. We 10.00% believe the user growth and revenue growth rates peaked 5.00% in 2016 for these regions and is now declining but will 0.00% remain strong. 2017 2018 2019 2020E 2021E 2022E Cost of revenue R&D Dep. & Amort. Overall, we are estimating an 8.26% global user growth in M&S G&A 2020 which descends to 2% in 2029 which corresponds to a 18.26% revenue growth in 2019 and declines gradually Research & Development Expenses to 3.02% growth in the last years estimate. We believe this is appropriate given the current saturation in the U.S. and We accounted for increased spending in research and Canada which is partially offset by the growth in development as we believe Facebook Inc. is starting to developing countries. branch into other industries, so they are not so reliant of just digital advertising. They are now putting more of an VALUATION emphasis on moving into the video game industry and even into payments with their Libra cryptocurrency. For In our model we calculated Facebook Inc.’s share price this reason, we have increased their R&D expense from its using the discounted cash flow, economic profit, dividend historical 3-year average of 18.9% up to 21% of sales discount and relative valuation methods. Each of these throughout the entire model. models are only as good as the inputs one provides which is why it is important to first forecast the income statement, balance sheet and cash flow statement which can be seen in the appendix.
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General & Administrative Expenses a cost of equity of 7.28% which by far impacts their WACC the most. This is because Facebook Inc.’s capital structure The other key operating account we increased was the is 94.5% equity and 5.5% debt. We calculated their cost of general and administrative expense. Before 2019 this has debt by taking the risk-free rate of 1.10%, plus our historically been about 6.5% of revenue but then spiked up estimated default premium of 1.09%, times Facebook to 14.8% in 2019 due to $5.5 billion dollars in lawsuits, they Inc.’s marginal tax rate of 18% to get the after tax cost of had to pay out regarding breaching privacy laws. We have debt of 1.80%. Facebook Inc.’s computed WACC is 6.97%. decided to estimate this account as 9% of revenue going forward until 2023 and then declining to 7.5% in the Valuation Models continuing value year of 2029. We did this because we believe Facebook Inc. will encounter more lawsuits in the Our discounted cash flow and economic profit models coming years but will eventually operate without the compute a stock price of $255 which is $70 higher than constant threat of breaking laws that are loosely written Facebook Inc.’s current price after its 15% decline in the once lawmakers get a better understanding of the industry last few weeks due to worries over the coronavirus. While and create firm laws that are more difficult to misinterpret this is a high target price, we believe it is Facebook Inc.’s or construe for companies like Facebook Inc. value today. In our model we were relatively conservative which lead to declining NOPLAT and ROIC percentages. In Overall, we are estimating an operating margin of 38.85% our drivers, NOPLAT growth is forecasted to be 15% in in 2020 which is lower than historical due to the increased 2020 and then gradually decline down to just 1.29% in costs in R&D and G&A. This operating margin stays 2029. This is much lower than in recent years which have relatively constant through 2027 and then declines down been between 30%-50% NOPLAT growth. The same goes to 34.89% in 2029. for our model’s ROIC which is forecasted to be 37% in 2020 and decreases down to 17% in 2029. This is a high ROIC for Share Repurchases most companies but for Facebook Inc. that is much lower than historical. This leads us to take the stance that our Facebook Inc. has historically not repurchased many of its stock price of $255 is a conservative price for Facebook Inc. shares until three years ago when it started buying billions today. worth. In 2018 they repurchased $12.8 billion dollars of shares and then $4 billion more in 20191. They have also The dividend discount model is useful for slow growth indicated in their 2019 10k that they plan to repurchase companies that pay consistent dividends, but Facebook another $10 billion worth soon. For this reason, we have Inc. does not pay dividends and we do not forecast that accounted for them to repurchase $6 billion in 2020 and they will in the next 10 years. We calculated the implied then growing at 5% each year. We do not think it will be dividend that Facebook Inc. could pay in the future from this amount consistently, rather large buybacks 8at certain its EPS in the continuing value year and discounted that times so we have evenly distributed out that cost instead back to today to come up with a stock price. This of trying to guess the years they will buy shares back. This methodology computed a share price of $147 which is very effects cash and the share count in our DDM model that low. We did not really put any weight in this valuation overall drives up the share price as shares are taken off the method in our recommendation as Facebook Inc. does not market. pay dividends. WACC Calculation The last model we did was a relative valuation comparison where we compared the EPS and P/E of Facebook Inc. with The WACC used in a valuation model makes a dramatic its competitors in the industry to see if it was fairly valued difference in the outcome and many of the inputs are for the industry. This model calculated a price of $275 educated assumptions. As of the model date on March 12, which is close to in line with our DDM and EP models. It the 10-year treasury was at 1.10% which is what we used shows that Facebook Inc. is undervalued compared to as our risk-free rate. Facebook Inc.’s beta from Bloomberg companies like Google, Microsoft, Amazon and Alibaba is 1.2 and we used an equity risk premium of 5.15%. This which are its closest competitors. We do believe much of was decided by our Henry Fund team to use universally the premium for those competitors is warranted given across all valuations. Using these inputs, Facebook Inc. has those companies are faster growing and have more
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diversified revenue streams. We gave moderate weight to INVESTMENT NEGATIVES this model in our recommendation. • Saturated North America and European markets have Overall, we arrived at a price target of $250-$260 a share limited potential for further user growth which implies a 35%-40% price appreciation in Facebook • Inc. stock solidifying our BUY recommendation. Changes in regulatory environment could hinder Facebook Inc.’s ability to collect user data and KEYS TO MONITOR therefore run effective advertisement campaigns • Currently heavily concentrated in one type of revenue Within the industry the growth rates of the U.S., European source, 98.5% of revenue comes from digital and Asia Pacific markets are most important to look at. 1 With slowing growth in the U.S. and Europe, we believe advertising the potential growth in the Asia-Pacific market is what is driving the stock today. If this optimism fades, we think the REFERENCES industry will plateau. 1. Facebook 10K Other key influencers to look out for are changing 2. Yahoo Finance: Facebook regulations that could fundamentally impact how digital 3. Hootsuite: Instagram Stats That Matter to advertisers make money. This especially pertains to Marketers in 2020 Facebook Inc. as they have been consistently under 4. VentureBeat: Facebook Messenger scrutiny for these types of lawsuits. 5. Fourtunly: WhatsApp Statistics: Revenue, Usage and History Lastly, Facebook Inc. frequently makes acquisitions so 6. CNBC: Facebooks $2 Billion Bet on Virtual Reality keep an eye out for news pertaining to any large 7. FactSet- Facebook Earnings acquisitions Facebook Inc. is rumored or in talks about 8. Gamesindustry.biz: Facebook acquires Sanzaru acquiring. Just as in the past, we believe Facebook Inc. will Games continue to grow this way and they may see this as a quick 9. AI News: How Coca-Cola Uses AI to Stay Ahead path to diversifying their revenue streams. 10. Bloomberg- Advertising & Marketing Dashboard 11. Medium: How Much Time People Spend on Social INVESTMENT POSITIVES Media 12. Wall Street Journal: Political Ad Spending • Facebook Inc. has a defensible mote of 2.26 billion 13. Facebook Website Data daily active users worldwide, this is 7x that of Twitter, 14. FRED the second largest social media platform in the world 15. The Balance: GDP Growth • We forecast 27% revenue growth in the Asia-Pacific 16. Politico market for 2020 which is a strong rate and the region 17. Forbes: How Privacy Laws are Changing 18. Google 10k presents a great opportunity for further expansion 19. Amazon 10k • Aggressive investors in future technologies such as 20. Microsoft 10k artificial intelligence, virtual reality, and 21. Alibaba 10k cryptocurrency along with a very active M&A team who knows how to add value through acquisitions • Global marketing spending is expected to increase IMPORTANT DISCLAIMER from 51.45% to 54.4% in 2020 with most of this going Henry Fund reports are created by graduate students into social media platforms like Facebook and enrolled in the Applied Securities Management program at Instagram10 the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students.
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Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.
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Facebook Revenue Decomposition In Millions Fiscal Years Ending 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Monthly Active Users (MAUs) # of Users (In Millions) 2129 2320 2497 2703 2917 3134 3344 3555 3748 3937 4120 4282 4346 Asia-Pacific 828 947 1038 1142 1245 1344 1438 1525 1601 1665 1731 1801 1828 YOY % Growth 23.03% 14.37% 9.61% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 4.00% 4.00% 1.50% Rest of World 692 750 817 899 989 1087 1185 1292 1395 1507 1612 1693 1718 YOY % Growth 14.19% 8.38% 8.93% 10.00% 10.00% 10.00% 9.00% 9.00% 8.00% 8.00% 7.00% 5.00% 1.50% Europe 370 381 394 410 426 439 452 466 475 484 492 499 507 YOY % Growth 6.02% 2.97% 3.41% 4.00% 4.00% 3.00% 3.00% 3.00% 2.00% 2.00% 1.50% 1.50% 1.50% US & Canada 239 242 248 253 258 263 268 272 277 281 285 289 294 YOY % Growth 3.46% 1.26% 2.48% 2.00% 2.00% 2.00% 2.00% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Total 2129 2320 2497 2703 2917 3134 3344 3555 3748 3937 4120 4282 4346 Total Growth Rate 14.52% 8.97% 7.63% 8.26% 7.92% 7.42% 6.71% 6.30% 5.43% 5.05% 4.66% 3.92% 1.50%
Average Revenue Per MAU US & Canada 84.41 111.97 139.35 150.50 162.54 172.29 179.18 186.35 191.94 197.70 201.65 205.68 207.74 YOY % Growth 35.64% 32.65% 24.45% 8.00% 8.00% 6.00% 4.00% 4.00% 3.00% 3.00% 2.00% 2.00% 1.00% Europe 27.41 36.68 44.14 48.55 52.92 57.16 61.16 64.22 66.79 68.79 70.16 70.87 71.58 YOY % Growth 41.29% 33.82% 20.34% 10.00% 9.00% 8.00% 7.00% 5.00% 4.00% 3.00% 2.00% 1.00% 1.00% Asia-Pacific 8.92 10.71 12.36 14.34 16.34 18.31 20.14 21.75 23.05 23.97 24.45 24.94 25.19 YOY % Growth 22.36% 20.07% 15.41% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 2.00% 1.00% Rest of World 6.20 7.52 8.74 10.31 11.96 13.64 15.27 16.80 18.15 19.24 20.00 20.40 20.61 YOY % Growth 33.05% 21.29% 16.22% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 1.00% Total $126.94 $166.88 $204.59 $223.70 $243.77 $261.39 $275.75 $289.12 $299.92 $309.70 $316.28 $321.90 $325.12
Revenue By Location US & Canada 20,174 27,097 34,559 38,070 41,938 45,343 48,100 50,774 53,082 55,495 57,454 59,482 60,978 Europe 10,142 13,975 17,391 19,895 22,554 25,089 27,650 29,904 31,722 33,327 34,503 35,371 36,261 Asia-Pacific 7,386 10,142 12,830 16,371 20,342 24,606 28,961 33,155 36,901 39,912 42,339 44,913 46,043 Rest of World 4,290 5,640 7,141 9,268 11,827 14,831 18,105 21,708 25,320 28,987 32,256 34,546 35,415 TOTAL REVENUE: 41,992 56,854 71,920 82,305 95,360 108,568 121,516 134,241 145,725 156,421 165,252 173,013 177,397
Revenue Growth 40,653 55,838 70,697 82,305 95,360 108,568 121,516 134,241 145,725 156,421 165,252 173,013 177,397 Total Percentage Growth 47.09% 37.35% 26.61% 16.42% 15.86% 13.85% 11.93% 10.47% 8.56% 7.34% 5.65% 4.70% 2.53% EBIT Growth 20,594 25,361 24,812 33,117 38,242 43,246 49,113 53,516 57,000 61,290 62,757 63,170 63,956 Percentage Growth 64.52% 23.15% -2.16% 33.47% 15.48% 13.09% 13.57% 8.97% 6.51% 7.53% 2.39% 0.66% 1.24% EPS Growth 5.49 7.65 6.47 9.46 10.96 12.55 14.17 15.49 16.70 17.84 18.31 18.65 18.76 Percentage Growth 54% 39% -15% 46% 15.87% 14.48% 12.89% 9.30% 7.79% 6.84% 2.67% 1.85% 0.56% Facebook Income Statement In Millions Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue 40,653 55,838 70,697 82,305 95,360 108,568 121,516 134,241 145,725 156,421 165,252 173,013 177,397 Cost of revenue -2,429 -5,040 -7,029 -8,230 -9,536 -10,857 -12,152 -13,424 -14,573 -14,078 -14,873 -15,571 -14,192 Research and development -7,754 -10,273 -13,600 -17,284 -20,026 -22,799 -25,518 -28,191 -30,602 -32,848 -34,703 -36,333 -37,253 Depreciation & Amortization -3,025 -4,315 -5,741 -5,978 -7,054 -8,324 -9,822 -11,590 -13,677 -16,138 -19,043 -22,471 -26,516 Marketing, Advertisement and sales -4,725 -7,846 -9,876 -11,523 -13,350 -15,200 -17,012 -18,794 -20,402 -21,899 -23,135 -24,222 -24,836 General and administrative -2,517 -3,451 -10,465 -7,407 -8,582 -9,771 -9,721 -10,739 -11,658 -12,514 -13,220 -13,841 -13,305 Total costs and expenses -20,450 -30,925 -46,711 -50,423 -58,549 -66,951 -74,226 -82,738 -90,911 -97,477 -104,975 -112,438 -116,101 Income from operations 20,203 24,913 23,986 31,882 36,811 41,617 47,290 51,503 54,814 58,943 60,278 60,575 61,295 Interest Income, net 392 652 904 1440 1669 1900 2127 2349 2550 2737 2892 3028 3104 Other income (expense) -1 -204 -78 -206 -238 -271 -304 -336 -364 -391 -413 -433 -443 Non Operating Income 391 448 826 1,235 1,430 1,629 1,823 2,014 2,186 2,346 2,479 2,595 2,661 Income before income taxes 20,594 25,361 24,812 33,117 38,242 43,246 49,113 53,516 57,000 61,290 62,757 63,170 63,956 Provision for income taxes -4,660 -3,249 -6,327 -5,961 -6,884 -7,784 -8,840 -9,633 -10,260 -11,032 -11,296 -11,371 -11,512 Net income 15,934 22,112 18,485 27,156 31,358 35,462 40,273 43,883 46,740 50,258 51,460 51,799 52,444 Net income attributable to participating securities -14 -1 0 0 0 0 0 0 0 0 0 0 0 Net income 15,920 22,111 18,485 27,156 31,358 35,462 40,273 43,883 46,740 50,258 51,460 51,799 52,444
EPS Basic 5.49 7.65 6.48 9.46 10.96 12.55 14.17 15.49 16.70 17.84 18.31 18.65 18.76 53.91% 39.30% -15.35% 46.10% 15.87% 14.48% 12.89% 9.30% 7.79% 6.84% 2.67% 1.85% 0.56% Basic Shares Outstanding 2,901 2,890 2,854 2,870 2,860 2,825 2,842 2,833 2,800 2,817 2,810 2,777 2,796 Dividends Paid 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Facebook Balance Sheet In Millions Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue 40,653 55,838 70,697 82,305 95,360 108,568 121,516 134,241 145,725 156,421 165,252 173,013 177,397 Assets: Cash and cash equivalents 8,079 10,019 19,079 34,795 57,714 84,708 114,629 146,907 188,850 217,464 253,180 287,405 320,007 Marketable securities 33,632 31,095 35,776 36,402 37,039 37,687 38,347 39,018 39,701 40,395 41,102 41,822 42,554 Accounts receivable, net of allowances for doubtful accounts 5,832 7,587 9,518 11,523 13,350 14,114 15,797 17,451 17,487 18,770 19,830 20,762 21,288 Prepaid expenses and other current assets 1,020 1,779 1,852 2,469 2,861 3,257 3,645 4,027 4,372 4,693 4,958 5,190 5,322 Current assets 48,563 50,480 66,225 85,189 110,965 139,766 172,418 207,404 250,409 281,322 319,071 355,179 389,170
Property and equipment, net 13,721 24,683 35,323 37,622 40,335 43,537 47,315 51,773 57,033 63,240 70,564 79,207 89,406 Operating lease right-of-use, net 0 0 9,460 11,163 13,172 15,543 18,341 21,642 25,538 30,135 35,559 41,959 49,512 Intangible assets, net 1,884 1,294 894 626 375 150 0 0 0 0 0 0 0 Goodwill 18,221 18,301 18,715 18,715 18,715 18,715 18,715 18,715 18,715 18,715 18,715 18,715 18,715 Other assets 2,135 2,576 2,759 3,292 3,814 4,343 4,861 5,370 5,829 6,257 6,610 6,921 7,096 Total Assets 84,524 97,334 133,376 156,607 187,377 222,054 261,650 304,903 357,524 399,669 450,519 501,981 553,898
Liabilities: Accounts payable 380 820 1,363 1,646 1,907 2,171 2,430 2,685 2,915 3,128 3,305 3,460 3,548 Operating lease 0 0 800 1,060 1,244 1,141 1,116 1,039 7,572 0 0 0 0 Partners payable 390 541 886 1,235 1,430 1,629 1,823 2,014 2,186 2,346 2,479 2,595 2,661 Accrued expenses and other current liabilities 2,892 5,509 11,735 8,230 9,536 10,857 12,152 13,424 14,573 15,642 16,525 17,301 17,740 Deferred revenue and deposits 98 147 269 288 334 380 425 470 510 547 578 606 621 Current liabilities 3,760 7,017 15,053 12,459 14,451 16,178 17,946 19,631 27,755 21,664 22,887 23,962 24,569 Long-term debt 0 0 0 0 0 0 0 0 0 0 0 0 0 Operating lease, non-current 0 0 9,524 11,238 13,261 15,648 18,465 21,789 25,711 30,338 35,799 42,243 49,847 Other liabilities 6,417 6,190 7,745 10,700 12,397 14,114 15,797 17,451 18,944 20,335 21,483 22,492 23,062 Total liabilities 10,177 13,207 32,322 34,397 40,109 45,940 52,208 58,871 72,410 72,337 80,170 88,697 97,478
Stockholders Equity: Common stock and APIC 40,584 42,906 45,851 45,851 45,851 45,851 45,851 45,851 45,851 45,851 45,851 45,851 45,851 Accumulated other comprehensive loss / income -227 -760 -489 -489 -489 -489 -489 -489 -489 -489 -489 -489 -489 Retained earnings 33,990 41,981 55,692 76,848 101,906 130,752 164,079 200,670 239,752 281,969 324,987 367,922 411,058 Total stockholders' equity 74,347 84,127 101,054 122,210 147,268 176,114 209,441 246,032 285,114 327,331 370,349 413,284 456,420 Total liabilities and stockholders' equity 84,524 97,334 133,376 156,607 187,377 222,054 261,650 304,903 357,524 399,669 450,519 501,981 553,898 Facebook Forecasted Cash Flow Statement In Millions Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Cash Flow From Operating Activities: Net Income 27,156 31,358 35,462 40,273 43,883 46,740 50,258 51,460 51,799 52,444 Depreciation and amortization 5,978 7,054 8,324 9,822 11,590 13,677 16,138 19,043 22,471 26,516 Change in receivables -2,005 -1,828 -763 -1,683 -1,654 -36 -1,283 -1,060 -931 -526 Change in prepaid expenses, other current assets -617 -392 -396 -388 -382 -345 -321 -265 -233 -132 Change in accounts payable 283 261 264 259 254 230 214 177 155 88 Change in defered revenue and deposits 19 46 46 45 45 40 37 31 27 15 Change in accrued expenses and other current liabilities -3,505 1,306 1,321 1,295 1,272 1,148 1,070 883 776 438 Change in partners payable 349 196 198 194 191 172 160 132 116 66 Total Cash Flow from Operating 27,658 38,001 44,455 49,817 55,200 61,627 66,273 70,402 74,181 78,910
Cash Flow From Investing Activities: Change in marketable securities -626 -637 -648 -660 -671 -683 -695 -707 -719 -732 Change in capital expenditures -8,277 -9,767 -11,526 -13,600 -16,048 -18,937 -22,346 -26,368 -31,114 -36,714 Capaitalization of intangiable assets 268 250 225 150 0 0 0 0 0 0 Change in other assets -533 -522 -528 -518 -509 -459 -428 -353 -310 -175 Change in other liabilities 2,955 1,697 1,717 1,683 1,654 1,493 1,390 1,148 1,009 570 Change in lease assets -1,703 -2,009 -2,371 -2,798 -3,301 -3,896 -4,597 -5,424 -6,401 -7,553 Total Cash Flow from Investing -7,917 -10,988 -13,131 -15,742 -18,875 -22,482 -26,674 -31,704 -37,535 -44,604
Cash Flow From Financing Activities: Change in shares purchased -6000 -6300 -6615 -6946 -7293 -7658 -8041 -8443 -8865 -9308 Changes in accumuliated other comprehensive income 0 0 0 0 0 0 0 0 0 0 Change in current lease liability 1,974 2,207 2,284 2,792 3,247 10,455 -2,944 5,461 6,444 7,604 Total Cash Flow from Financing -4,026 -4,093 -4,331 -4,154 -4,046 2,797 -10,985 -2,982 -2,421 -1,704
Net Increase in cash 15,716 22,920 26,994 29,921 32,278 41,943 28,614 35,716 34,225 32,601 Beginning Cash 19,079 34,795 57,714 84,708 114,629 146,907 188,850 217,464 253,180 287,405 Ending Cash 34,795 57,714 84,708 114,629 146,907 188,850 217,464 253,180 287,405 320,007 Facebook Common Size Income Statement as % of Sales
Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of revenue 5.97% 9.03% 9.94% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 9.00% 9.00% 9.00% 8.00% Research and development 19.07% 18.40% 19.24% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% Depreciation & Amortization 7.44% 7.73% 8.12% 7.26% 7.40% 7.67% 8.08% 8.63% 9.39% 10.32% 11.52% 12.99% 14.95% Marketing, Advertisement and sales 11.62% 14.05% 13.97% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% General and administrative 6.19% 6.18% 14.80% 9.00% 9.00% 9.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 7.50% Total costs and expenses 50.30% 55.38% 66.07% 61.26% 61.40% 61.67% 61.08% 61.63% 62.39% 62.32% 63.52% 64.99% 65.45% Income from operations 49.70% 44.62% 33.93% 38.74% 38.60% 38.33% 38.92% 38.37% 37.61% 37.68% 36.48% 35.01% 34.55% Interest income -0.96% -1.17% -1.28% -1.75% -1.75% -1.75% -1.75% -1.75% -1.75% -1.75% -1.75% -1.75% -1.75% Other income (expense) 0.00% 0.37% 0.11% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% Non Operating Income -0.96% -0.80% -1.17% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% Income before income taxes 50.66% 45.42% 35.10% 40.24% 40.10% 39.83% 40.42% 39.87% 39.11% 39.18% 37.98% 36.51% 36.05% Provision for / benefit from income taxes 11.46% 5.82% 8.95% 7.24% 7.22% 7.17% 7.28% 7.18% 7.04% 7.05% 6.84% 6.57% 6.49% Net income 39.20% 39.60% 26.15% 32.99% 32.88% 32.66% 33.14% 32.69% 32.07% 32.13% 31.14% 29.94% 29.56% Net income attributable to participating securities 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net income 39.16% 39.60% 26.15% 32.99% 32.88% 32.66% 33.14% 32.69% 32.07% 32.13% 31.14% 29.94% 29.56% Facebook Common Size Balance Sheet as % of Sales
Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Assets: Cash and cash equivalents 19.87% 17.94% 26.99% 42.28% 60.52% 78.02% 94.33% 109.44% 129.59% 139.03% 153.21% 166.12% 180.39% Marketable securities 82.73% 55.69% 50.60% 44.23% 38.84% 34.71% 31.56% 29.07% 27.24% 25.82% 24.87% 24.17% 23.99% Accounts receivable, net of allowances for doubtful accounts 14.35% 13.59% 13.46% 14.00% 14.00% 13.00% 13.00% 13.00% 12.00% 12.00% 12.00% 12.00% 12.00% Prepaid expenses and other current assets 2.51% 3.19% 2.62% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Current assets 119.46% 90.40% 93.67% 103.50% 116.36% 128.74% 141.89% 154.50% 171.84% 179.85% 193.08% 205.29% 219.38% Property and equipment, gross 33.75% 44.20% 49.96% 45.71% 42.30% 40.10% 38.94% 38.57% 39.14% 40.43% 42.70% 45.78% 50.40% Operating lease right-of-use, net 0.00% 0.00% 13.38% 13.56% 13.81% 14.32% 15.09% 16.12% 17.52% 19.27% 21.52% 24.25% 27.91% Intangible assets, net 4.63% 2.32% 1.26% 0.76% 0.39% 0.14% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 44.82% 32.78% 26.47% 22.74% 19.63% 17.24% 15.40% 13.94% 12.84% 11.96% 11.33% 10.82% 10.55% Other assets 5.25% 4.61% 3.90% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Total Assets 207.92% 174.31% 188.66% 190.28% 196.49% 204.53% 215.32% 227.13% 245.34% 255.51% 272.62% 290.14% 312.24%
Liabilities: Accounts payable 0.93% 1.47% 1.93% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Operating lease 0.00% 0.00% 1.13% 1.29% 1.30% 1.05% 0.92% 0.77% 5.20% 0.00% 0.00% 0.00% 0.00% Partners payable 0.96% 0.97% 1.25% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Accrued expenses and other current liabilities 7.11% 9.87% 16.60% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Deferred revenue and deposits 0.24% 0.26% 0.38% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% Current liabilities 9.25% 12.57% 21.29% 15.14% 15.15% 14.90% 14.77% 14.62% 19.05% 13.85% 13.85% 13.85% 13.85% Long-term debt Operating lease, non-current 0.00% 0.00% 13.47% 13.65% 13.91% 14.41% 15.20% 16.23% 17.64% 19.40% 21.66% 24.42% 28.10% Other liabilities 15.78% 11.09% 10.96% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% Total liabilities 25.03% 23.65% 45.72% 41.79% 42.06% 42.31% 42.96% 43.85% 49.69% 46.25% 48.51% 51.27% 54.95%
Stockholders Equity: Common stock and additional paid-in capital 99.83% 76.84% 64.86% 55.71% 48.08% 42.23% 37.73% 34.16% 31.46% 29.31% 27.75% 26.50% 25.85% Accumulated other comprehensive loss / income -0.56% -1.36% -0.69% -0.59% -0.51% -0.45% -0.40% -0.36% -0.34% -0.31% -0.30% -0.28% -0.28% Retained earnings 83.61% 75.18% 78.78% 93.37% 106.86% 120.43% 135.03% 149.49% 164.52% 180.26% 196.66% 212.66% 231.72% Total stockholders' equity 182.88% 150.66% 142.94% 148.48% 154.43% 162.22% 172.36% 183.28% 195.65% 209.26% 224.11% 238.88% 257.29% Total liabilities and stockholders' equity 207.92% 174.31% 188.66% 190.28% 196.49% 204.53% 215.32% 227.13% 245.34% 255.51% 272.62% 290.14% 312.24% Facebook Value Driver Estimation In Millions Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E NOPLAT: Revenue 40,653 55,838 70,697 82,305 95,360 108,568 121,516 134,241 145,725 156,421 165,252 173,013 177,397 Cost of revenue -2,429 -5,040 -7,029 -8,230 -9,536 -10,857 -12,152 -13,424 -14,573 -14,078 -14,873 -15,571 -14,192 Research and development -7,754 -10,273 -13,600 -17,284 -20,026 -22,799 -25,518 -28,191 -30,602 -32,848 -34,703 -36,333 -37,253 Depreciation & Amortization -3,025 -4,315 -5,741 -5,978 -7,054 -8,324 -9,822 -11,590 -13,677 -16,138 -19,043 -22,471 -26,516 Marketing, Advertisement and sales -4,725 -7,846 -9,876 -11,523 -13,350 -15,200 -17,012 -18,794 -20,402 -21,899 -23,135 -24,222 -24,836 General and administrative -2,517 -3,451 -10,465 -7,407 -8,582 -9,771 -9,721 -10,739 -11,658 -12,514 -13,220 -13,841 -13,305 Implied Operating Lease Interest 39 90 272 277 284 290 296 303 309 316 323 330 337 EBITA: 20,242 25,003 24,258 32,159 37,095 41,907 47,587 51,805 55,124 59,259 60,601 60,905 61,633
Adjusted Taxes: Provision for income taxes 4,660 3,249 6,327 5,961 6,884 7,784 8,840 9,633 10,260 11,032 11,296 11,371 11,512 Marginal Tax Rate (Statutory-State) 34.40% 20.30% 19.20% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
Provision for income taxes 4,660 3,249 6,327 5,961 6,884 7,784 8,840 9,633 10,260 11,032 11,296 11,371 11,512 Tax on Lease Interest 13 18 52 50 51 52 53 54 56 57 58 59 61 Tax on Other Income -132 -151 -279 -417 -483 -550 -616 -681 -739 -793 -838 -877 -899 Adjusted Taxes: 4,541 3,116 6,100 5,594 6,451 7,286 8,278 9,007 9,577 10,296 10,516 10,553 10,673
Change In Deferred Income Taxes 377 -286 37 0 0 0 0 0 0 0 0 0 0
NOPLAT: 16,078 21,601 18,195 26,566 30,644 34,621 39,309 42,799 45,547 48,963 50,084 50,352 50,959 NOPLAT Growth Rate 51.21% 34.35% -15.77% 46.01% 15.35% 12.98% 13.54% 8.88% 6.42% 7.50% 2.29% 0.53% 1.21%
Invested Capital (IC): Operating CA: Normal Cash 7,318 10,051 12,725 14,815 17,165 19,542 21,873 24,163 26,231 28,156 29,745 31,142 31,931 Accounts receivable 5,832 7,587 9,518 11,523 13,350 14,114 15,797 17,451 17,487 18,770 19,830 20,762 21,288 Prepaid expenses 1,020 1,779 1,852 2,469 2,861 3,257 3,645 4,027 4,372 4,693 4,958 5,190 5,322 Operating CA: 14,170 19,417 24,095 28,807 33,376 36,913 41,316 45,642 48,089 51,619 54,533 57,094 58,541
Non-Interest CL: Accounts payable 380 820 1,363 1,646 1,907 2,171 2,430 2,685 2,915 3,128 3,305 3,460 3,548 Partners payable 390 541 886 1,235 1,430 1,629 1,823 2,014 2,186 2,346 2,479 2,595 2,661 Accrued expenses and other current liabilities 2,892 5,509 11,735 8,230 9,536 10,857 12,152 13,424 14,573 15,642 16,525 17,301 17,740 Deferred revenue and deposits 98 147 269 288 334 380 425 470 510 547 578 606 621 Non-Interest CL: 3,760 7,017 14,253 11,399 13,207 15,037 16,830 18,592 20,183 21,664 22,887 23,962 24,569
Other LT Operating Assets: Property, Plant and Equipment 18,337 31,573 45,986 54,263 64,031 75,556 89,157 105,205 124,142 146,487 172,855 203,969 240,683 Intangible assets, net 1,884 1,294 894 626 375 150 0 0 0 0 0 0 0 Other assets 2,135 2,576 2,759 3,292 3,814 4,343 4,861 5,370 5,829 6,257 6,610 6,921 7,096 PV of operating leases 4,106 12,400 11,471 13,536 15,972 18,847 22,240 26,243 30,967 36,541 43,118 50,879 60,038 Other LT Operating Assets: 26,462 47,843 61,110 71,717 84,193 98,897 116,257 136,817 160,937 189,285 222,583 261,769 307,817
Other LT Operating Liabilities: Other liabilities 6,417 6,190 7,745 10,700 12,397 14,114 15,797 17,451 18,944 20,335 21,483 22,492 23,062 Other LT Operating Liabilities: 6,417 6,190 7,745 10,700 12,397 14,114 15,797 17,451 18,944 20,335 21,483 22,492 23,062
Invested Capital (IC) 30,455 54,052 63,208 78,425 91,965 106,659 124,946 146,416 169,900 198,905 232,746 272,409 318,727
Free Cash Flow (FCF): NOPLAT 16,078 21,601 18,195 26,566 30,644 34,621 39,309 42,799 45,547 48,963 50,084 50,352 50,959 Less Change in IC 8,863 23,597 9,155 15,218 13,540 14,694 18,286 21,470 23,484 29,005 33,841 39,663 46,318 FCF 7,215 -1,996 9,039 11,348 17,104 19,927 21,023 21,328 22,063 19,958 16,243 10,689 4,642
Return on Invested Capital (ROIC): NOPLAT 16,078 21,601 18,195 26,566 30,644 34,621 39,309 42,799 45,547 48,963 50,084 50,352 50,959 Beg. IC 21,592 30,455 54,052 63,208 78,425 91,965 106,659 124,946 146,416 169,900 198,905 232,746 272,409 ROIC 74% 71% 34% 42% 39% 38% 37% 34% 31% 29% 25% 22% 19%
Economic Profit (EP): Beg. IC 21,592 30,455 54,052 63,208 78,425 91,965 106,659 124,946 146,416 169,900 198,905 232,746 272,409 x (ROIC - WACC) 67% 64% 27% 35% 32% 31% 30% 27% 24% 22% 18% 15% 12% EP 14,572 19,477 14,425 22,158 25,174 28,207 31,870 34,085 35,335 37,114 36,212 34,120 31,960 Facebook Key Management Ratios
Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E
Liquidity Ratios: Current Ratio (CA/CL) 12.92 7.19 4.40 6.84 7.68 8.64 9.61 10.56 9.02 12.99 13.94 14.82 15.84 Cash Ratio (Cash+Marketable Securities)/(CL) 11.09 5.86 3.64 5.71 6.56 7.57 8.52 9.47 8.23 11.90 12.86 13.74 14.76 Quick Ratio (Cash+Marketable Securities+ AR)/CL 12.64 6.94 4.28 6.64 7.48 8.44 9.40 10.36 8.86 12.77 13.72 14.61 15.62
Asset-Management Ratios: Account Receivable Turnover (Revenue)/(Avg Accounts Receivable) 6.97 7.36 7.43 7.14 7.14 7.69 7.69 7.69 8.33 8.33 8.33 8.33 8.33 Total Assets Turnover (Revenue)/(Avg Total Assets) 0.48 0.57 0.53 0.53 0.51 0.49 0.46 0.44 0.41 0.39 0.37 0.34 0.32 Net Working Capital Turnover (Revenue/ NWC) 0.91 1.28 1.38 1.13 0.99 0.88 0.79 0.71 0.65 0.60 0.56 0.52 0.49
Financial Leverage Ratios: Debt Ratio (TL/TA) 0.12 0.14 0.24 0.22 0.21 0.21 0.20 0.19 0.20 0.18 0.18 0.18 0.18 Equity Ratio (Common Equity/TA) 0.48 0.44 0.34 0.29 0.24 0.21 0.18 0.15 0.13 0.11 0.10 0.09 0.08 Debt to Equity (TL/Common Equity) 0.25 0.31 0.70 0.75 0.87 1.00 1.14 1.28 1.58 1.58 1.75 1.93 2.13
Profitability Ratios: Profit Margin (Net Income/ Net Sales) 39.16% 39.60% 26.15% 32.99% 32.88% 32.66% 33.14% 32.69% 32.07% 32.13% 31.14% 29.94% 29.56% Gross Margin (Sales-Cost of Revenue)/ Revenue 94.03% 90.97% 90.06% 90.00% 90.00% 90.00% 90.00% 90.00% 90.00% 91.00% 91.00% 91.00% 92.00% EBITDA Margin (EBITDA/ Net Sales) 49.79% 44.78% 34.31% 39.07% 38.90% 38.60% 39.16% 38.59% 37.83% 37.88% 36.67% 35.20% 34.74% ROE (Net Income/ TA) 18.83% 22.72% 13.86% 17.34% 16.74% 15.97% 15.39% 14.39% 13.07% 12.57% 11.42% 10.32% 9.47%
Payout Policy Ratios: Total Payout Ratio ((Divs. + Repurchases)/NI) 12.41% 58.25% 22.73% 22.09% 20.09% 18.65% 17.25% 16.62% 16.38% 16.00% 16.41% 17.11% 17.75% Facebook Weighted Average Cost of Capital (WACC) Estimation In Millions
Cost of Equity: ASSUMPTIONS: Risk-Free Rate 1.10% 10 year treasury Beta 1.20 Beta from Bloomberg Equity Risk Premium 5.15% Henry Fund Estimate Cost of Equity 7.28%
Cost of Debt: Risk-Free Rate 1.10% 10 year treasury Implied Default Premium 1.09% Pre-tax COD-risk free rate Pre-Tax Cost of Debt 2.19% Bloomberg 10 year yield on debt Marginal Tax Rate 18% After-Tax Cost of Debt 1.80%
Market Value of Common Equity: MV Weights Total Shares Outstanding 2,405 Current Stock Price $192.47 MV of Equity 462,890 94.43%
Market Value of Debt: Short-Term Debt 15,053 Current Portion of LTD 800 Long-Term Debt 0 PV of Operating Leases 11,471 MV of Total Debt 27,324.06 5.57%
Market Value of the Firm 490,214 100.00%
Estimated WACC 6.97% Facebook Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models In Millions Key Inputs: CV Growth of NOPLAT 1.21% CV Year ROIC 18.71% WACC 6.97% Cost of Equity 7.28%
Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E CV
DCF Model: Free Cash Flow (FCF) 11,348 17,104 19,927 21,023 21,328 22,063 19,958 16,243 10,689 Continuing Value (CV) 826,447 PV of FCF 10,608 14,947 16,278 16,054 15,225 14,723 12,450 9,472 456,332
Value of Operating Assets: 566,087 Non-Operating Adjustments: Marketable Securities 35,776 Normal Cash 14,815 Less: PV of Operating Leases -11,471
Value of Equity 605,207 Shares Outstanding 2405 Intrinsic Value of Last FYE $ 251.65 Implied Price as of Today $ 254.76
EP Model: Economic Profit (EP) 22,158 25,174 28,207 31,870 34,085 35,335 37,114 36,212 34,120 Continuing Value (CV) 554,038 PV of EP 20,713 21,999 23,042 24,337 24,331 23,579 23,152 21,116 320,611
Total PV of EP 502,880 Invested Capital (last FYE) 63,208 Value of Operating Assets: 566,087 Non-Operating Adjustments: Marketable Securities 35,776 Normal Cash 14,815 Less: PV of Operating Leases -11,471
Value of Equity 605,207 Shares Outstanding 2405 Intrinsic Value of Last FYE $ 251.65 Implied Price as of Today $ 254.76 Facebook Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E
EPS $ 9.46 $ 10.96 $ 12.55 $ 14.17 $ 15.49 $ 16.70 $ 17.84 $ 18.31 $ 18.65 $ 18.76
Key Assumptions CV growth of EPS 0.56% CV Year ROE 11.49% Cost of Equity 7.28%
Future Cash Flows P/E Multiple (CV Year) 14.16 EPS (CV Year) $ 18.76 Future Stock Price Theoretical Dividends Per Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 $ 265.61 Discounted Cash Flows $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 141.12
Intrinsic Value as of Last FYE $ 141.12 Implied Price as of Today $ 142.86 Facebook Relative Valuation Models
EPS EPS Ticker Company Price 2020E 2021E P/E 20 P/E 21 GOOGL Alphabet $1,339.33 $54.12 $62.48 24.75 21.44 MSFT Microsoft $162.01 $5.66 $6.32 28.62 25.63 AMZN Amazon $1,883.75 $28.20 $40.24 66.80 46.81 BABA Alibaba $208.00 $56.46 $42.26 3.68 4.92 TWTR Twitter $33.20 $0.32 $0.45 Average 30.96 24.70
FB Facebook $192.47 $9.46 $10.96 20.3 17.6
Implied Relative Value: P/E (EPS20) $ 293.00 P/E (EPS21) $ 270.84 Facebook Present Value of Operating Lease Obligations In Millions Fiscal Years Ending Dec. 31 2012 2013 2014 2015 2016 2017 2018 2019 Year 1 142 142 155 209 277 409 698 1,060 Year 2 128 142 161 230 284 464 946 1,244 Year 3 117 139 158 216 265 470 1,055 1,141 Year 4 110 131 143 200 221 448 1,048 1,116 Year 5 102 112 125 159 184 430 1,054 1,039 Thereafter 253 312 359 438 733 2,423 9,850 7,572 Total Minimum Payments 852 978 1,101 1,452 1,964 4,644 14,651 13,172 Less: Cumulative Interest 70 83 95 121 182 538 2,251 1,701 PV of Minimum Payments 782 895 1,006 1,331 1,782 4,106 12,400 11,471
Implied Interest in Year 1 Payment 29.0 17.1 19.6 22.0 29.1 39.0 89.9 271.5
Pre-Tax Cost of Debt 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19% Years Implied by Year 6 Payment 2.5 2.8 2.9 2.8 4.0 5.6 9.3 7.3 Expected Obligation in Year 6 & Beyond 102 112 125 159 184 430 1,054 1,039 Facebook Share Change Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Change in Treasury Stock 6,000 6,300 6,615 6,946 7,293 7,658 8,041 8,443 8,865 9,308 Expected Price of Repurchased Shares: $ 192.00 $ 209.86 $ 229.37 $ 250.70 $ 274.02 $ 299.50 $ 327.36 $ 357.80 $ 391.08 $ 427.45 Number of Shares Repurchased: 31 30 29 28 27 26 25 24 23 22
Shares Outstanding (beginning of the year) 2,901 2,890 2,854 2,870 2,860 2,825 2,842 2,833 2,800 2,817 Plus: Shares Issued Through ESOP 0 0 0 0 0 0 0 0 0 0 Less: Shares Repurchased in Treasury 31 30 29 28 27 26 25 24 23 22 Shares Outstanding (end of the year) 2,870 2,860 2,825 2,842 2,833 2,800 2,817 2,810 2,777 2,796 Facebook Sensitivity Tables
Beta CV US User Growth 254.76 0.90 1.00 1.10 1.20 1.30 1.40 1.50 254.76 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 0.50% 415.30 362.22 320.39 286.63 258.87 235.67 216.03 0.25% 236.93 241.52 246.46 251.81 257.61 263.94 270.85 0.70% 393.09 344.85 306.46 275.23 249.38 227.67 209.20 0.50% 239.19 243.96 249.11 254.70 260.78 267.41 274.68 0.90% 372.96 328.94 293.59 264.63 240.51 220.15 202.76 0.75% 241.53 246.50 251.88 257.72 264.08 271.05 278.70 1.10% 354.65 314.33 281.68 254.76 232.21 213.08 196.67 1.00% 243.96 249.14 254.76 260.87 267.55 274.87 282.94 1.30% 337.92 300.86 270.63 245.54 224.42 206.42 190.92 1.25% 246.48 251.89 257.76 264.17 271.18 278.88 287.40
Risk-free Rate Risk-free 1.50% 322.58 288.42 260.35 236.92 217.09 200.13 185.47 1.50% 249.11 254.76 260.90 267.62 274.98 283.11 292.10 CV US RPU Growth US RPU CV 1.70% 308.47 276.89 250.76 228.84 210.20 194.19 180.30 1.75% 251.85 257.75 264.18 271.23 278.98 287.55 297.07
CV NOPLAT Growth CV European User Growth 254.76 0.88% 0.98% 1.09% 1.21% 1.33% 1.46% 1.60% 254.76 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 3.75% 349.93 354.58 359.99 366.34 373.06 380.92 390.21 0.25% 243.58 246.57 249.70 252.99 256.44 260.07 263.90 4.17% 312.37 315.89 319.98 324.74 329.76 335.59 342.43 0.50% 245.06 248.13 251.34 254.72 258.27 262.01 265.95 4.64% 278.47 281.11 284.16 287.70 291.41 295.70 300.69 0.75% 246.57 249.72 253.03 256.50 260.16 264.01 268.07 5.15% 247.94 249.90 252.15 254.76 257.47 260.59 264.21 1.00% 248.13 251.36 254.76 258.33 262.09 266.05 270.24 5.67% 223.02 224.49 226.19 228.13 230.16 232.47 235.14 1.25% 249.72 253.04 256.53 260.20 264.07 268.16 272.48 6.23% 200.45 201.55 202.80 204.24 205.73 207.43 209.38 1.50% 251.34 254.76 258.35 262.13 266.11 270.32 274.78 Effective Risk Premium
6.85% 180.07 180.88 181.79 182.84 183.92 185.15 186.55 Growth RPU European CV 1.75% 253.01 256.52 260.21 264.10 268.21 272.55 277.15
WACC 254.76 5.08% 5.65% 6.28% 6.97% 7.67% 8.44% 9.28% 15% 418.47 359.03 308.96 266.57 233.71 205.26 180.59 16% 412.47 353.83 304.45 262.63 230.23 202.17 177.85 17% 406.46 348.63 299.93 258.69 226.74 199.09 175.11 18% 400.46 343.44 295.41 254.76 223.26 196.00 172.37 19% 394.46 338.24 290.90 250.82 219.78 192.91 169.63 20% 388.46 333.04 286.38 246.88 216.29 189.83 166.89 Marginal Tax Rate 21% 382.47 327.85 281.87 242.95 212.81 186.74 164.15