For Immediate Release
Facebook Model, Part II
Prior to the Facebook (FB) IPO I wrote an investment idea on how to make a model of the Facebook Income Statement. I left that article pretty wide open just walking through the skeleton of how a sell side analyst would get the topline estimates. Since that time the IPO flopped and the stock traded substantially lower.
The quiet period is over for the dozens of investment banks that were co-managers of the IPO so the research analyst can now publish their reports. The leads on the IPO were Morgan Stanley (MS), Goldman Sachs (GS) and JPMorgan Chase (JPM). Would it surprise you to learn that those three "book runners" have the highest price targets on the stock?
Price targets aside, let's look at a few of the reports and their models and compare and contrast the key moving parts of each.
The Goldman Report
Goldman Sachs has two top analysts covering Facebook. Heath Terry and Heather Bellini. This was an oddity in that Bellini historically covers software names like salesForce.com (CRM). Her input is important though as she does cover other major tech firms. Heath Terry is more of a traditional internet analyst.
The 89 page report outlines the key drivers for the model. The first of which is Users. They model out both Monthly Average Users (:MAU) and Daily Average Users (:DAU) for each region. World Wide MAU's are projected to grow to 1.07 billion in 2012 to 1.3 billion in 2013 to 1.54 billion for 2014. That implies growth that decelerates from 69% growth in 2010 to 39% in 2011 to 26% in 2012. The rate of decline slows significantly for 2013 to 22%.
The next driver for the revenue model is ad impressions. The model includes the idea that mobile has yet to be monetized. Ad impressions do not see the same growth pattern as MAU's. Facebook saw a 41% growth in ad impressions in 2011 which is expected to slow to 23% in 2012 and then is expect to grow to 30% in 2013. It should be noted that the model is looking for very large growth from Asia and Rest of the World segments as compared to the 14% North American growth in 2013.
CPM's or cost per thousand is another key driver for the Facebook model. These are the costs that advertisers are paying for exposure on the Facebook network. Advertisers can designate specific geographies to market to, but in total, the world wide CPM rate is expect to slow from 20% in 2011 to 3% in 2012 and 5% in 2013.
Those are the basics that drive Goldman model to revenue estimates of $4.852 billion in 2012 (31% growth rate from 2011) to $6.591 billion in 2013 (an increase to 36% growth form 2012). Most will point to the incredible deceleration of revenue growth from 2011 to 2012. In that year, revenue growth is expected to slow from 88% to 31%.
The William Blair Model
The William Blair model is not quite as detailed but does offer a base care, the bear case, the bull case and the aggressive case. The model is a top down and easy to follow. The focus on MAU's multiplied by ad loads (ads per user) to generate a total impressions served number. This is then multiplied by the average CPM rate to derive revenue.
The bear case assumes MAU's decline from 150 million to 100 million in 2013 and 2014. The ad load is also project to decrease 5% each year but a 4% growth in CPM's in 2013 and 2014.
The bull case sees some growth in MAU's, a flat ad load number and significant increases in CPM's. The aggressive case is the bull case with the ad load growing. The operating metrics and margins in the aggressive case are pretty aggressive, but certainly not impossible. The idea behind this method of analysis shows the leverage of the operating model, which, when greased correctly, can have a serious impact.
There are several models which follow the same functionality of both Goldman Sachs and William Blair. One other report, from Raymond James analyst Aaron Kessler, speaks to the significant monetization potential. The key attributes that Facebook provides advertisers are 1) reach, 2) relevance, 3) social context and 4) engagement.
Due to the scale and high amounts of shared information (user generated content) on Facebook, the potential for greater wallet share among advertisers is high. The Raymond James report goes a little deeper than others into those ideas.
Now that you have (or may not yet) created your own Facebook model you have some good "reality checks" and ideas from these large brokerage reports. As you look at a possible investment in Facebook, you must determine are you doing this for a trade (short time horizon) or an investment (at least one year). Growth for Facebook is not a sure thing, but now you have a frame work and guidance on how to look at the future of Facebook.
This means that this specific investment idea has now become a small series, and I will be sure to continue the series after Facebook reports earnings in the coming weeks.
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