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 M A M J J A S O N D J F brand. 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 Page 2 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.