Facebook, Inc. (FB)

Facebook, Inc. (FB)

Price Target $35.00.   

Date: 11/27/12                         Price: $26.26               Volume:77.62M

KEY STATISTICS.

Market Cap:                         56.89B                           Total Cash (mrq):                     2,478M

Price/Earnings (ttm):              135.80                            Total cash per share (mrq)        1.14

Price/Sales (ttm):                   12.27                              Total Debt (mrq)                      1,864M

Price/Book:                          4.01                                 Book Value per share (mrq)    6.54

Most Recent Quarter:           Sep 30, 2012                  52 Week Range                       17.55-45.00

Profit Margin (ttm):               6.28%                            50 Day Moving Average          21.12

Operating Margin (ttm):        12.13%                          200 Day Moving Average        24.23

Revenue (ttm):                      4.64B                             Shares Outstanding                  2,166.43M

Gross Profit (ttm):                 N/A                                Float                                       1.30B

EBITDA (ttm):                     1.09B                             % Held by Insiders                  0.75%

Revenue/Share (ttm):            2.14                                Debt/Equity:                            0.13
Debt/Cash:                           0.75

OVERVIEW.

            As a new publicly traded company, Facebook, Inc. has limited financial data to be able to measure the progress over a long period of time. However, I believe that with the current information available and the trends we are seeing on the industry I can analyze the performance of the company and assess a price target I think might be appropriate.

                Management has indicated three core segments they are focusing on. One “is to build the best and most ubiquitous mobile product” as said by Mark Zuckerberg during the last conference call on October 23, 2012. Second is to build a platform that enables the apps to be more social. Last but not least, the monetizing issue, where management has given every department within the company the ability and responsibility to be in charge of monetize within their own product they offer.

                Let’s not forget the fact that Facebook is the leading (by far) social platform in the whole world. This allows the company to be well positioned to monetize quick and strong in a short period of time. Mobile for example, is barely taking off as far as monetizing products. During the last conference call of the company, management acknowledged that 3Q12 was the first time ever the company made any revenue on mobile and it did it nicely, representing a 14% of the overall revenue for the quarter. Should this continue, it will, in my opinion, become the principal source of revenue for the company within the next three or four quarters.

  

EARNINGS REVIEW.

                Revenue has consistently been increasing over the last 9 quarters (showed by the company on the slides presentation of 3Q12) from 467 million on 3Q10 to 1,262 million on the most recent quarter. This represents an average of about 13% increase (compounded) sequentially but has decreased to an average of about 3.5% during the last 4 quarters.

                When comparing with the same quarter from last year, this has increased by 306 million or 32% y/y. Also, during 3Q12 we saw revenue from mobile that was not present during same period last year. Mobile revenue was about 152 million for the quarter. Without this revenue the company would have still be up from last year but a more moderate rate (about 16%). When calculating the growth on a y/y basis without the revenue that mobile brought during the quarter and breaking it down in to the two segments the company uses to measure performance we still have a nice growth rate. Revenue from advertising, which is the main source of income so far, increased 17% year-over-year and revenue from payments and other fees (gaming for example) also increased double digits, 13% year-over-year.

                Having said that, the company not only continues to grow on its core business but found a new way to generate revenue. Mobile, is becoming more and more important for every company out there and in my opinion, Facebook is well positioned to take advantage of that by being the creators of their own products and not depending on others to come up with the solution.

                Also, there will be a change in the way they recognize the payments revenue as stated by the company on the slides presentation of 3Q12. During the past, the company has recognized payments revenue one month after it actually happens. This was because they have a 30 day period for claims and disputes; it is just common sense they waited those 30 days to recognize true and already earned money. Starting this coming quarter, the company will start recognizing payments revenue as it happens therefore making 4Q12 a 4-month quarter. This will be possible because now the company has enough information to estimate future refunds and charge backs.

COSTS AND EXPENSES REVIEW.

                Here is where the company has a challenge. Although during 3Q12 they managed to spend less than the revenue, expenses did not go up in accordance with revenue. In other words, revenue increased 32% y/y for the quarter but costs and expenses went up almost twice as much, 63% compared to same period last year.

                It is true that most of the increase in spending has a lot to do with the RSU’s (restricted stock units) that were part of the compensation plan prior to the IPO and are barely being recognized during this fiscal year. However, the head count increased considerably this year making the company more vulnerable to payroll-related expenses such as medical (which by the way is about to change due to the “Obama-care”) taxes and other.

                This is an area that it is important to keep a close eye during the coming quarters in order to better understand management and their decisions about this.

SOME METRICS.

Monthly Active Users (MAU’s)

                Unlike revenue, MAU’s have been increasing at a more moderate but nice and steady pace during the past 9 quarters as presented on the last earnings presentation. From 550 million MAU’s on 3Q10 to a 1,007 million MAU’s on 3Q12, averaging 50 million more MAU’s per quarter.

                One important fact that I think will affect very positively the monetizing side of the company, is that mobile MAU’s were 604 million during the last quarter. If we take in consideration that before this quarter none of the revenue was coming from mobile users then we can be sure that this figure will impact considerably well the following quarters as the company continue to roll out more mobile products and implement better strategies to monetize mobile users.

Average Revenue per User (ARPU)

                Revenue per user has been above the $1.00 mark (per quarter) since the 4^th quarter of 2010, and averaging about $1.29 during the last 4 quarters. The 4Q of the last two years have seen the highest ARPU of the year, so we can easily expect to have a stronger 4Q12 and if we add the mobile strategy I am confident we can surpass or at least hit the $1.40 per user. You may think it is way above the $1.29 average of the last 4 quarters, but it’s only $0.02 above the $1.38 reported during the same quarter last year.

BALANCE SHEET.

                Here’s a brief explanation and analysis on the balance sheet of the company. Overall I think it is well positioned to grow over the short term by being well capitalized and having little debt on the books allowing management to focus on the business and not on debt management.

Shares Outstanding.

                2,166,427,308 shares are outstanding and more than half (1.3B approx.) are floating. I don’t think this is very good to have as many shares as they do. However, if this is used correctly, shareholders can benefit from it if the company makes good and smart acquisition via shares instead of cash. I will continue to monitor the shares outstanding for signs of further dilution (which will hurt the bottom line) or any improvements such as buybacks or reverse splits.

Book Value.

                The book value per share as of the most recent quarter (3Q12) is $6.53 which in my opinion is healthy for a company of recent IPO. This value, gives us a current P/B of 4.02 not bad if we consider the 4.66 that the industry has as an average.

Price to Earnings.

                Based on the current stock price, the P/E is 135.93 which I consider to be pretty high. However, the earnings per share during the last few quarters has been affected by the recognition of the stock-compensation prior to 2011 that until the IPO had not been recognized in the books. Once the company finishes recognizing the previous stock-based compensation and return to normal practices the P/E should come to a better level.

Debt to Cash.

               

                Here is something I believe to be very positive. Having a ratio of 0.75 on the total debt to cash on hand is quite good for any company. Even if the company does not generate any more free cash in the short term they are still able to pay off the entire debt just with the cash they have on hand as of the last quarter.

Debt to Equity.

                Also a positive sign, with a ratio of 0.13 when considering the entire debt to the equity the company currently holds. As long as no more debt is incurred by the company, or if it will take more debt to do it in a responsible way and in proportion to the equity this should be a great sign of the health and gives more confidence to investors.

4Q12 ESTIMATE.

                After the analysis of the data I have available and which I have mentioned above. Here are my conclusions and estimates for the coming quarter.

REVENUE.

                To be able to give my estimate as far as revenue for 4Q12 I used several pieces of information; Monthly active users (MAU’s), average revenue per user (ARPU), revenue recognition (extra month on payments) and trends on such items.

Monthly Active Users.

                As I mentioned before, the MAU’s have been increasing constantly during the past two years at a similar pace of 50 million users more per quarter. Since it does not show sign of deceleration on the most recent quarters I will assume we will have at least 1,060 million users during the quarter.

Average Revenue Per User.

                Here, I will be a little more conservative. We know that during the last quarter of the year is when we have a higher ARPU than the rest of the year. $1.40 per user is quite conservative, based on the fact that during the 4Q11 was $1.38 and even though there was no revenue coming from mobile.

                There were 432 million mobile users during 4Q11 and based on the last report of 604 million mobile users during 3Q12 I can assume that we will see at least 625 million mobile users. This, and the mobile monetizing that started during the last quarter makes me confident that we can reach that $1.40 ARPU mark on 4Q12.

Payment Revenue Recognition.

                On the slides presentation for 3Q12 an explanation was given to investors that this quarter will see an extra month of payment revenue. I think it will be safe to take the average of 62 million (based on the last 12 months of payment revenue the company has reported) and add it to the revenue as part of the extra month of payment revenue to be recognized. I have not given any increase (growth) on this figure due to the uncertainty of the outcome because we saw a decrease on payments from ZYNGA during last quarter.

MAU’s (estimated)              1,060 million

ARPU (estimated)               $1.40­­____

Revenue (estimated)           $1,484 million

Payment Rev (estimated)  $62 million (Extra month expected to be recognized)

Total Rev expected            $1,546 million

Note: The $1,546 million in revenue I’m estimating is just based on the numbers we currently have and considering nothing more than the ability of the company to maintain its performance but not adding any revenue or estimates from new products such as mobile monetization other than the 2 cents I explained above. If the numbers are kept and mobile revenue becomes reassuring, then it can easily beat my estimate by at least 200 million. 

COSTS AND EXPENSES.

                The method I used to calculate the following figures are only based on the average the company reported during the last few quarters (except where noted) that I was able to obtain publicly. Also, it has been given to us the estimate of share-based compensation that the company expects to incur during this quarter ($190 million) which I will add to the end of my estimates.

Cost of Revenue                  $386

Marketing & Sales             $170

Research & Develop          $139

General & Admin                $124

Share-based comp               $190 (as expected per management)

Total Costs & Expenses    $1,009  

Operating Income               $537

Interest Income (exp)         ($4)

Income Tax                         $220 (41% tax rate expected)

Net Income                         $317M

EPS                                      $0.15

Forward P/E (ttm)                109 (based on current price and assuming $0.24 EPS for full fiscal 2012)

In my opinion, there are a lot of opportunities for Facebook to keep generating money and add new forms of revenue in the short term. For example, they can start generating revenue through advertising in Instagram (the newly acquired company that is attracting more and more users every month) or by referring to people to sites where they buy products or service and charging a fee or percentage of the sale (the Amazon way).  

Just based on the numbers we have and without a new source of revenue I can easily see Facebook generating $6,616 millions in revenue during 2013 and earnings per share (EPS) of $0.61. Increasing its book value to $7.20

DISCLOSURE.

I Adrian Gomez, do not own any shares of any company mentioned above at the time of publication. I do not receive any compensation from any of the companies mentioned or its affiliates. This is intended only as my personal opinion and should not be taken as a recommendation to buy or sell any of the equities mentioned. Please consider seeking advise from your financial adviser before investing, do your own research and come to your own conclusions. 

Price Target is for 12 months after publication.

Updates will be made after each earnings release unless I consider adequate to do it before.