This note was originally published on June 25, 2012. I have not updated it since that time.
After $FB's earnings report on July 26, and the stock's subsequent dip into the low $20s, I purchased FB shares in my own account. As of July 27, 2012 I am no longer technically unbiased, though the amount I invested in FB stock is actually a small amount compared to my total net worth (less than 1%).
Reach out to me directly at 415-287-0472 to discuss this note, or to purchase a copy of the live excel models exhibited in this report. See bottom of page for more about me (@brustkern), including contact information.
Our Underlying Thesis
Our underlying thesis is that Facebook is a game-changing platform that allows individuals and organizations to leverage one's own digital identity. In exchange, Facebook acquires an extraordinary amount of authentic information relating to the likes, intentions and influencers of nearly a billion people worldwide.
We believe that consumers generally accept and see value in this exchange, and that Facebook will become increasingly important, even as it learns to monetize its user base. Having deep, fresh knowledge of its vast user base allows Facebook to provide advertisers unprecedented knowledge of consumers, which leads us to the conclusion that Facebook-powered marketing engines will dominate the landscape.
There are many important themes today; among them, we believe Facebook has won Social and Photo; as far as Mobile, Local, Social-enhanced Search, and Video are concerned, Facebook is in the hunt, and has the resources to win any or all.
- Our investment deck can be found on slideshare.
- A 50-minute webinar on the fundamentals of Facebook's valuation can be found on Vimeo.
We initially published a forecast and valuation of Facebook for our clients when the company was still private. We made these projections publicly available in February 2012. Today (June 25, 2012) we are publicly releasing our updated forecast model(s) exhibiting the valuation of Facebook across six different growth scenarios:
- Original Arcstone Equity Research forecast from Feb 2012 (non-seasonal)
- Google-like growth (with seasonality)
- Delayed rocket (with seasonality)
- Much-delayed take-off (with seasonality)
- Composite Comps-like growth (with seasonality)
- Comps were were chosen based on revenue growth patterns exhibited over the past decade, and include: VMWare, Cognizant, eBay, Yahoo and Salesforce.com
We value Facebook using each of the above scenarios using a Discounted Cash Flow approach subject to a discount rate of 10% (vs. a calculated Weighted Average Cost of Capital of 9%).
Scenario #6 reflecting the 6/25/12 closing price per share is below.
This is the low scenario.
Price Target Ranges for the Low Scenario (#6)
We run sensitivity analyses against discount rates and the number of shares (basic, weighted average, and fully diluted).
Range estimates for Scenario #6 are below.
This is the low scenario. Due to the complexity of the model, there is some rounding and approximation in the below results.
Range estimates for Scenario #3 "delayed rocket" are below.
This is the most favorable scenario in our analysis. As we explain briefly below, this is our most likely scenario. Again, there is some rounding and approximation in the below results due to the complexity of the model.
Price Targets for Each Scenario
Our per share price target for each growth scenario are as follows:
- Original AER forecast from Feb 2012: $58
- Google-like growth: $59
- Delayed rocket: $66
- Much-delayed take-off: $49
- Composite Comps-like growth: $40
- Growth reflecting the Current Price per Share in the marketplace: approximately $32 to $33 per share (recent closing prices as of mid-June 2012)
Another way to look at the same conclusions is this:
Our call: the Delayed Rocket
We believe Facebook will follow the “delayed rocket” path; that is, that Facebook's intrinsic value is worth north of $65 per share.
This is tricky for investors because the "delayed" aspect of the model means Facebook will appear to underperform for many quarters while it builds potential energy; however, when the company goes kinetic we believe its cash flows will rocket upward.
A Note from the Author: I NOW OWN FACEBOOK STOCK
The original publication date of this note was June 25, 2012. I bought FB in my personal account on July 27, 2012, nearly 30 days after the publication of this note, and after the stock fell by nearly 30% from its June 25, 2012 level. The amount I invested in FB stock is small (less than 1%) compared to my personal net worth.
My policy, and the policy held by Arcstone Equity Research, prohibits trading in companies currently under coverage. Therefore, we are no longer covering Facebook for public benefit; no further updates to this valuation will be made.
You can contact me at 415-287-0472.