I asked a really bright college student who loves trading and Wall Street and technology and all that stuff to take what he knew about my Facebook analysis and build off it with more detail and maybe some new insights into the stock that we might have missed.
He sent me this a couple weeks ago when the stock was just about at $20 a share and I finally read it and really liked the analysis so I wanted to share it with all of you. The kid’s name is Bryce Smith and he’s actually a graduate of Truth of Consequences public school system. Yes, that really is a town in NM. Without further ado, here’s his Facebook juice:
Facebook is a revolutionary company that will offer significant return to investors over the long term. Coming public in May the stock is off 50% from its IPO price of 38$ per share with a near $100 Billion dollar market cap. Today the company is valued at $41 billion. The company has shown significant growth over the past and has nearly 1 billion monthly active users.
Facebook is currently spending 38% of their operating income on R&D and General Expenses. According to the Q2 conference call, they are spending heavily on infrastructure expansion around the world and also bringing in the best minds in the business to work out mobile expansion. They call themselves a “mobile first” company.
In 2011, there were 700 million Smartphone subscriptions around the world. This number will increase to 4-5 billion by 2016. Some estimates are in the 10 billion range by 2016. With 543 million mobile users, that is 77% of total smartphones in the world. Assuming that this market penetration holds over the next four years, that would put Facebook on 3.08 Billion smartphones in 2016. Today there are roughly 1.1 billion personal computers in the world. With 412 million Facebook users currently accessing the website via pc, that is only 37% penetration into all of the pc‘s of the world. When you get a smartphone, you are more enticed to use Facebook even if you previously didn’t have an account. I personally can say that I created my Facebook account on a tablet and I can count the number of times that I have accessed it on a computer using my fingers.
With the Facebook App now standard on iOS 5 and OSX, even more people will be tempted to create an account do to easy access. A person with Facebook on their smartphone may access the website anywhere from 3-5 times a day. Even if Facebook only makes $4.84 per user (the current metric) in 2016, that takes revenue to $14.9 billion by 2016. Facebook’s estimated revenue for this year is somewhere in the range of $5.5 billion. Assuming a 30% net profit margin, the company will make $4.5 billion in 2016. That means that EPS will be in the range of $2.08. At a justifiable P/E of 20, that takes the company to a price of $42.
Apps, Adds, and the Facebook Platform
The Open Graph is one of the startup programs happening at Facebook. Apps integrated with Facebook will be very public on the news feed. Not only do my friends get to see what app I am using, they will see what I do with it as well. This is social advertising at its utmost potential. To be able to see the utility of an app makes more people want to use it. Currently, 1 Billion pieces of information about apps are shared every single day. Mark Zuckerburg called it a startup program. App developers know that when they integrate with Facebook, they will be getting the best return possible.
Mark Zuckerburg’s key focus in the last conference call was better, more social ads. By keeping this focus at the top of Facebooks priority, they are starting to come up with effective ways of monetization, especially in the area of mobile. The Sponsored Stories campaign is already starting to take off and is generating $1 million a day, half of which is coming from mobile. These initiatives will continue to gain traction as Facebook creates a deeper user experience and as advertisers see the ROI generated by their Facebook add.
Along with these areas, the expansion of the Facebook platform will take the company to the next level in terms of monetization and ultimately profitability. As we have seen with mobile, the closer you are to Facebook, the more you integrate it into your life. In the conference call, CEO Mark Zuckerburg gave insight into the expansion of the Facebook platform. He said that someday even your car will be integrated with your Facebook profile. The platform will gain more utility to consumers as it expands and grows deeper into every social and business enterprise in our modern world. Apple and many other companies are now looking to take commerce online. Mobile banking has already been a big success. If it were integrated into the Facebook platform, it would offer even more utility. For example, most people have several bank accounts, credit and debit cards, income streams, and bills to pay. With Facebook, one simple login and password would give you access to all of these. This is one small example of how big Facebook could be. In Zuckerburg’s own words, “It’s worth calling out that our vision for platform is bigger than what most people perceive”.
What I have discussed will give Facebook the opportunity to increase what it charges for advertising. I think it is fair to say that through these initiatives, Facebook could double what it makes per user in four years. So say Facebook makes $10 a year per user, or 2.7 cents a day per user. Multiply that times 3.08 Billion users and it gives you $30.8 billion in revenue in 2016. At 30% net profit margin, that means the company will make $9.24 billion or $4.30 per share. At a p/e of 20, that values each share at $86 or a $184 Billion Market Cap.