Yesterday (1/30) I spoke with
on what I'll be looking for in Facebook's S-1 filing, which is
expected out soon. I discussed some of the parallels between
Facebook's S-1 and Zynga's (
) S-1 (Zynga being the first multi-billion dollar company built
almost entirely on Facebook's platform), and between Facebook's IPO
and Google's (
) IPO. You can view that interview
Google is the best comparison for Facebook for a number of
- Both companies developed disruptive technologies that
revolutionized the world of online advertising.
- Both derived the majority of revenues from advertising, and
rapidly developed into global media properties.
- Both surprised some investors and demonstrated their
revenue-generating power by continuing to grow at or above 100%
Y/Y, even after reaching multi-billion dollar scale.
However, Facebook also has some key advantages over Google that
could allow the company to trade at a premium to the 9x forward
revenues Google traded at (on average) for several years after its
own 2004 IPO. Based on our estimates and the 10x forward P/S
multiple we believe Facebook may trade at after the IPO, a $100
billion IPO valuation is justifiable, and the company's value will
likely exceed $100 billion by the end of 2012.
Some advantages to Facebook's model include:
More diversified revenue base
. Google still generates +95% of revenues from advertising, while
we expect Facebook generated +10% of 4Q11 revenues from Facebook
Credits (E-Commerce) lines, including the sale of virtual goods
in social games made by partners like Zynga, Disney's (
) Playdom, CrowdStar, RockYou and Germany's Wooga (short for
World of Gaming). We believe that Facebook has many more "levers
to pull" in E-Commerce and that investors will pay a premium for
this more diversified base of business.
We expect that Facebook will show higher EBITDA margins than
Google's 40% margin at the time of its IPO. This is partly
because the Google revenue number we use in calculating GOOG's
margin includes traffic acquisition cost ("TAC"), which Facebook
does not have. The absence of TAC for Facebook points to two
strengths: 1) higher margins, and 2) the absence of an owned
& operated ad network - a potential source of significant
future growth if the company does deploy its own social ad
Dominant market position; advantages to the operating
Facebook has an uncommon model where the users create/are the
content that attracts other users, and the presence of +800
million (fast approaching 1 billion) worldwide users attracts
thousands of third-party app developers to build social software
plug-ins that make the social experience on Facebook even more
engaging, then pay 30% off the top of all revenues their apps
generate to Facebook via the Facebook Credits social currency. It
is an enviable model.
Now, with no further hesitation...
What to look for in the Facebook S-1:
. For comparison, Google had approximately 40% EBITDA margins in
2004, the year of its IPO. We believe Facebook's margins are at
or above this level. We will also be looking at OCF and FCF
margins as a percentage of revenue. Net profit tends to be less
correlated with stock price for high-growth Internet
Facebook Credits - E-Commerce revenues.
While Google still generates ~96% of its revenues from
advertising, we estimate that Facebook generates +10% of revenues
in 4Q from E-Commerce lines, which fall under Facebook Credits,
the company's PayPal-like online wallet/payments platform.
This diversification is one of several advantages Facebook
has over Google and other Internet advertising peers, and is part
of the reason we believe a 10x forward P/S multiple is
Any and all information that investors can glean about Facebook
Credits from the S-1 will be valuable.
. We expect Y/Y revenue growth for the most recent period to come
in between 75-100% Y/Y, and we believe this rate of growth is
necessary to justify the 10x P/S and 25-30x EV/EBITDA multiple
that we see fit for Facebook based on its unparalleled market
position and growth prospects. We believe that growth could slow
to 75% or less for a quarter, before re-accelerating due to the
early-stage nature of the Credits/E-Commerce businesses.
Other Internet heavyweights like Google and Groupon (
) already generate more than 50% of revenues from outside the
U.S. Facebook maintains a leaner team than Google, and we believe
it has very large future upside potential for International
advertising revenues, besides the upside we see to global
Microsoft, Zynga, Groupon and LivingSocial are all large Facebook
advertisers. It will be interesting to see which if any among
these currently represent 10% or more of Facebook's overall
revenue. Facebook may also reveal if there are any other
customers who account for more than 10% of advertising revenues,
but not more than 10% of overall revenues, as well as what
percentage of Facebook Credits revenues come from Zynga.
In each geography where Facebook has active users, we have seen
similar trends: rapid growth in the active user count is followed
by rapid growth in average time spent on Facebook per user, which
is then followed in time by growth in monetization. Active user
count and average/total time spent on Facebook are among the key
metrics we will be looking for.
Just as Zynga's S-1 provided information about a 3% equity
investment that Google had made in Zynga, Facebook's S-1 could
provide more information about Microsoft's investment in and
partnership with Facebook, as well as other potentially
meaningful third party investments in Facebook and
Facebook in other companies. It never hurts to scan the entire
document for all references to partners and competitors, such as
Microsoft, Google, Zynga and Twitter. Music/film/media partners
are also of interest.
Patents are a big part of why Facebook has more of a protective
"moat" than Friendster and MySpace before it. Zynga's S-1 for
example provided insights into its own key patents, and how
pending legislation may impact its ability to defend those
patents and associated intellectual property.
Other growth initiatives.
We have identified +10 other potential areas of potential future
revenue growth for Facebook, including Social Learning software,
online photo processing and others. We believe the S-1 could
provide clues regarding other areas where the company is making
investments to prepare for future growth.
The global technology platform.
Details of infrastructure investment will also be valuable, to
the extent that they are provided in the S-1. While we believe
Facebook's platform has the potential to be more scalable and
generate more revenue per employee than Google over the medium to
longer term due to the amount of "heavy lifting" that is done by
Facebook's third party developer partners, the apps and
associated resource usage generated by those partners also
require Facebook to invest heavily in developing and maintaining
a world-class technology infrastructure. This makes capex and
technology partnerships more important.
Size and description of acquisitions.
Any additional detail on acquisitions Facebook has done will be
helpful, both in terms of understanding how Facebook views its
own strategy for growth and of how it looks at acquisition
candidates from a valuation standpoint.
Please stay tuned, we will also be providing analysis of
Facebook's S-1 once it is filed.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Nexstar Broadcasting Group's CEO Discusses Q4 2011
Results - Earnings Call Transcript