FACEBOOKKandukuri Sai Omkar, ERIBITS Pilani K.K Birla Goa Campus

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The author is not responsible for any inaccuracies of the values or opinions in the following presentation.

Call: SELL

Quick Facts• Company Name – Facebook.inc• Ticker Symbol – FB (NASDAQ)• Headquarters – Menlo Park, California,

United States• Year of IPO – 2012• Number of shares – 2.15 billion shares• Number of Employees – 17,048• Industry – Internet• Chief Executive Officer – Mark Zuckerberg• Executive Chairman – Mark Zuckerberg

Industry Overview

• Over the last decade, social media has evolved from being a mere platform to a part and parcel of the everyday life of users.

• Several figures indicate that Facebook had 1.79 bn monthly active users as of third quarter of 2016.

• Facebook has a huge user base consisting of users from all ages and regions.• Updating self with the news has become a most major part of everyone’s life nowadays and

Facebook has given a platform for the news channels and papers to share news and gain users insights fro the same.

• Recently, Indian telecom regulators handed Facebook a rare loss by effectively banning “free basics”  a Facebook-led program that would have allowed Indian users to access a suite of mobile internet services, including Facebook, without it counting against their data plans.

PEST ANALYSIS

PEST Analysis

Political:• Users and governments have been

expressing privacy concerns which could harm the company’s strategy to use user information to deliver effective advertisement

• German data protection official also warned Facebook investors during its IPO that the social network’s operational performance is based on practices that breach European privacy rules

• Political barriers in the Chinese market and support from other governments for digitalization and globalization.

PEST Analysis

Economic:• Facebook contributes nearly 15.3 billion $$ value to the European economy

and provides 232,000 jobs across Europe .• The Facebook App also is a major economy with a €2bn worth and employ 30k

people.• While at IPO in 2012 Facebook shares were available at 38$ per share with

421,233,615 shares making it a 104bn valued company raising a whopping $16 billion through the offering.

• The revenue growth rates highlight the company’s inherent ability to drive growth, Facebook being the market leader with strong potential in a relatively underpenetrated market of social network advertising.

• The company’s high cash flow generation capability indicates that the company enjoys high financial flexibility. Facebook faces several challenges in terms of monetizing its reach and drive revenues. The company’s free cash flow position enables it to invest in expansion inorganically. Facebook will be able to fund its expansion plans at feasible rates

PEST Analysis

Social:• Facebook help the user to stay in touch with friends, relatives and

other acquaintances from anywhere in the world, as long as there is access to the internet. A reunion with the help of Facebook was between John Watson and his daughter after 20 years. They met after Watson found her Facebook profile .

• Facebook has become a platform to socialize and to connect with people in different parts of the world.

• It also helps businesses to grow and connect with the customers and provide better services.

• With the App Center, Facebook is expected to be afore runner in creating a mobile social experience, a potential market that is largely untapped

PEST Analysis

Technological:• Facebook uses a huge range of services, tools, and programming languages to

make up its back-end.• At the front end, their servers run a LAMP (Linux, Apache, MySQL, and PHP)

stack with Memory Cache. • Few tools Facebook developed are Thrift, Scribe and Cassandra(database).• Estimates indicate that the average click-through rate (CTR), away of

measuring the success of an online advertising campaign for a particular website, of an ad on the Google Display Network is 0.4% which is estimated to be about 10 times as high as the typical Facebook ad.

• The comparison suggests that Google currently offers advertisers more value in terms of both options and results, in comparison to Facebook

PORTER’S FIVE FORCES MODEL

Threat of New Entrants: (LOW)

• Threat of new entrants in the social network industry is very low.

• The major problem for a new entrant is to face a giant company Facebook which is well situated in the field with over 1bn users active per month.

• Google+ was the only competitor that worked hard to cope up with Facebook in the race but wasn’t able to get to Facebook’s standard as many people are already well acquainted with Facebook.

Threat of Substitutes: (Moderate)

• Threat of substitutes is moderate.

• Some countries do have their own social networks such as :1) Wer- kennt -wen (English: “Who-knows-whom”) – Germany

2) Renren Network (English: "Everyone's Website”) – China

3) VK - largest European social network with more than a 100 million active.

4)Google – All over the world

Bargaining power of customers:

Customer - Advertiser.• Revenue in a quarter - $1.585 billion(2012)• Revenue from advertising - $1.33 billion (84% of total revenue).(2012)

Customer – User• Monthly active users - 1.24 bn (2016).• The user data is used by Facebook for advertising purposes within the site. • The bargaining power is high when it comes to privacy issues.

Bargaining power of Suppliers: (LOW)

Suppliers – Users• Facebook is nothing without its users. • The information received from the users (through likes, comments, posts etc) are used by

Facebook ad to push advertises to the user’s screen.

• The bargaining power of user is high due to other social networking sites providing exactly the same thing as Facebook but with different or additional features.

Rivalry in the Industry: (HIGH)

• Competitive rivalry in the industry is low.

• There is no other social networking site with more than 1billion monthly users.

• And most of the social networking sites (like vk.com ,renren.com ,etc) are local geographically.

• Google+ can be considered as a capable rival but it has only 1/10 th of active users when as compared to that of Facebook’s.

SWOT ANALYSIS

Strengths:• Facebook is one of the most successful

companies in the world. • Market penetration : 1)66% of Internet users in the US. 2)46% in Asia (excluding China) 3)46% in Europe• Huge increase in income, cash flow and profits• Market Share – nearly 70% • Acquisition of WhatsApp - 500 million• Services

1) Messaging2) Mobile money transfer.3) Video chat and calling.

• Companies are using ads to get insights from customers for newer products to drive more sales.

Weakness:

• Less number of clicks on ads

• Only Revenue – Advertisements on Facebook

• Attitude towards user privacy

• Minimum website customization

• Weak protection of user information

Opportunities:

• Increasing number of people using Facebook

• Expansion to china 

• Diversity source of revenue

• Use of Modern Technology

• Open market place

Threats:• Increasing number of mobile internet users

• Reduction in Ad space in Mobile App

• Users using ad-block extensions.

• Slow growth rate of online advertising.

• Hacks and Identity thefts.

RATIO ANALYSIS

EBIDTA Margin Net profit margin Return on Assets

• Facebook – 0.45 Facebook – 36.9% Facebook – 15.71%• Twitter – 0.0539 Twitter - -18.06% Twitter - -6.68%• LinkedIn – 0.091 LinkedIn – -5.51% LinkedIn - -2.65%

P/E ratio• Facebook – 33.06• Twitter –-18.05• LinkedIn – N/A

Price to Sales ratio• Facebook – 12.03• Twitter – 4.64• LinkedIn – 8.88

Return on Equity• Facebook – 25.74

%• Twitter - -10.18%• LinkedIn - -4.26%

Current Ratio• Facebook – 11.9• Twitter – 7.97• LinkedIn – 3.31

Debt to Equity• Facebook –

0.1452• Twitter – 0.367• LinkedIn – 0.2521

• EBITDA Margin – Facebook is doing good in comparison to Twitter and LinkedIn

• Net Profit Margin – Facebook is doing great compared to its competitors.

• Return on Assets – Facebook is leading ahead.• Return on Equity – Facebook is having highest, hence excessive

leverage which might become a problem in long term.• Current Ratio – Facebook has a huge current ratio indicating it is

paying its current libities better than its competitors.• P/E ratio – Facebook has higher P/E shoes higher growth.• Debt to Equity – Facebook is not over leveraged.• P/S ratio – Facebook is far ahead of Twitter but close to LinkedIn

Historical Stock Performance

CAPM

Variables ValueBeta Value 0.7Rm 15%Rf 2.26%Re 11.46983

Relative ValuationNumber of Shares Outstanding : 2892 millionCurrent market price per share : 138.67 USDTerminal growth rate :5%Target price : 98.97 USDExpected return of stock : -29.28%

Kandukuri Sai Omkar, ERIBITS Pilani K.K Birla Goa Campus