Green Crest Capital - Facebook (Executive Summary)

Facebook GreenCrest Capital
19 May 2011 Management LLC
Equity Research –Facebook
Executive Summary
19 May 2011 | 5 pages

GreenCrest Capital provides equity research on private companies. In order to provide
quality reports, our analysts utilize forensic analytical methods to obtain between 70 and
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company.
(212) 607‐5456 or email
Facebook’s Future: F‐Commerce research@greencrestcapital.com
Unleashing the Power of Personal Recommendations

Facebook Revenue Growth Scenarios
• Facebook, the world’s largest online social network, opened to all users in September of
2006, and in less than five years has grown to over 650 million active users (about 10%
of the world’s population). Facebook is a truly global company, with 70% of users outside
the US. Collectively, Facebook and Twitter have revolutionized the way we communicate,
and Facebook is early in the process of ramping up monetization.
•
While Facebook’s revenue model is primarily advertising‐driven, it has a more
diversified base of business than most firms in the online advertising space, including
Google. More than 10% of Facebook’s revenues come from its “freemium” services
(mostly games) developed by third party software partners, who have become key to
Facebook’s success in its transaction‐based businesses.
Comparing Historical Revenue Growth
• Facebook is currently passing through an inflection point, both in terms of the
monetization of its advertising platform, and in terms of the adoption of its new Trends of Google, Facebook
payment solution: Facebook Credits. The uncertainty in the marketplace that is created
because of the high rate of change around Facebook’s core businesses may allow
investors an attractive entry point ahead of what we expect will be continued high
growth rates in Facebook’s revenue going forward.
• We talk throughout this report about “the power of the personal recommendation,”
which we believe Facebook is just now beginning to tap via Sponsored Stories (SS). We
expect that SS, Sponsored check‐ins, and other forms of product recommendation will
allow Facebook to unlock the power of the personal recommendation and build a large
and high‐growth transactional revenue stream.
• Now that FB has established its own (PayPal style) payments platform, we expect the AB Mendez, CFA
company will increase the pace of turning on more transactional business models, of
which it has access to many. Facebook Payments, a subsidiary incorporated in 12/2010,
will operate Facebook Credits, which we expect to be a boon to both revenue growth and
Senior Equity Analyst
Direct: (212) 607‐5456
Abm@greencrestcapital.com
margins over the long term, as the company continues to diversify its business.
•
Competition in any online industry will always be intense, and there is always the
chance that someone builds a better mouse trap. However, users have invested a great
Nitsan Hargil, CFA
Senior Equity Analyst
deal of time in building out their networks on FB, and have uploaded over 60 billion Direct: (212) 607‐5456
photos. Facebook’s extensive patent portfolio (we analyze within) is another barrier. NitsanH@greencrestcapital.com
• Valuation: Facebook has high margins (op margin estimated at 48% in 2010) and very
strong revenue growth. We expect that the company will continue to trade at high

GreenCrest Capital Management LLC
multiples (e.g., 10x forward revenues) for the foreseeable future, unless/until there is 100 Wall Street, 8th Floor
evidence of slowing revenue growth, which we do not expect to see in the near future.
We currently value Facebook at $89 billion, based on four separate analyses including
New York, NY 10005
Main: (212) 607‐5423
price‐to‐sales, price‐to‐EBITDA, and two DCF scenarios. http://www.greencrestcapital.com
Legal Disclaimer
GreenCrest Capital Management LLC (Hereafter “GreenCrest”) does and seeks to do business with companies covered in its research report. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. This document does not contain all the information needed to make an investment decision, including but not limited
to, the risks and costs.
Page 1 GreenCrest Capital Management LLC

Facebook
19 May 2011
Table of Contents (of Full Report)

Executive Summary: Facebook is Central to the Future of Internet Media and E‐Commerce 7
Brief Background 8
Facebook 101 9
Facebook’s US User Growth – A Look at the Big Picture 12
SWOT Analysis 16
SWOT Summary 16
Strengths 16
Weaknesses 17
Opportunities 17
Threats 17
Valuation 18
Price‐to‐Sales Valuation 21
Price‐to‐EBITDA Valuation 22
DCF Valuation Analysis 23
More Investment Considerations 23
Investment Recommendation 24
Market Overview 25
Facebook’s Reach and Revenue Opportunity: Truly Global 25
Defining Facebook’s Addressable Market – Lines of Business 29
Online Advertising ‐ Display 31
Facebook Credits 34
Credits ‐ Social Gaming 34
Credits ‐ Social Commerce 36
Investment Positives 37
The Current State of Facebook Monetization 39
Facebook Ads 39
Facebook Credits 49
Paradigm Shift, and New Monetization Opportunities 52
THE “QUICK AND THE BOLD” – OPPORTUNITIES FACEBOOK IS ALREADY MOVING TO ADDRESS 56
Other Key Considerations 68
Corporate Culture and Identity at Facebook 68
Facebook Investment Funding 69
Risks 70
Monetization 70
Legal 70
Valuation 70
Privacy, and Other Internet Illusions 70
Competition 71
Social Networking Competition in General 71
Google 71
Mobile Search 74
Disclaimer 86

For more information about this report or to purchase full, individual reports or annual subscriptions, please
call GreenCrest Research at (212) 607‐5456 or email us at research@greencrestcapital.com

Facebook
19 May 2011
Tables and Figures
FIGURE 1: FACEBOOK TOOLS FOR BUILDING YOUR “SOCIAL GRAPH” 7
FIGURE 2: FACEBOOK AT THE CENTER OF USERS’ PERSONAL (NON‐BUSINESS) ONLINE LIVES 9
FIGURE 3: COMPARING HISTORICAL REVENUE GROWTH TRENDS OF GOOGLE, FACEBOOK 10
FIGURE 4: US SITE VISITORS – FACEBOOK, GOOGLE (INCLUDING YOUTUBE) AND YOUTUBE ALONE 11
FIGURE 5: US TIME SPENT 11
FIGURE 6: SHARE OF US TIME SPENT 12
FIGURE 8: US AND INTERNATIONAL FACEBOOK USER GROWTH AND REVENUE PER USER ESTIMATES 18
FIGURE 9: CURRENT VALUATIONS OF RELEVANT SOCIAL MEDIA AND SOCIAL COMMERCE FIRMS 19
FIGURE 10: VALUATION SUMMARY 19
FIGURE 11: PRICE‐TO‐SALES VALUATION SUMMARY ($ MILLIONS) 20
FIGURE 12: PRICE‐TO‐EBITDA SUMMARY ($ MILLIONS) 20
FIGURE 13: HIGHER‐ GROWTH AND LOWER GROWTH SCENARIOS ($ MILLIONS) 21
FIGURE 14: GLOBAL INTERNET POPULATION, AS OF 2009 24
FIGURE 15: WORLDWIDE INTERNET PENETRATION BY REGION (NICE CHART – ADD MILLIONS AND 100% ON BOTTOM RIGHT) 25
FIGURE 16: WORLDWIDE FACEBOOK PENETRATION BY REGION 26
FIGURE 17: FACEBOOK PENETRATION IN CERTAIN EUROPEAN COUNTRIES 27
FIGURE 18: US DISPLAY ADVERTISING BREAKDOWN – 2007‐2010 29
FIGURE 19: PERCENT OF OVERALL US INTERNET ADVERTISING REVENUE – SEARCH VS. DISPLAY 31
FIGURE 20: GCC ESTIMATES – ZYNGA ACCOUNTS FOR THE MAJORITY OF SOCIAL GAMING REVENUES 32
FIGURE 21: DAILY/LOCAL DEALS REVENUE WILL ACCOUNT FOR MAJORITY OF SOCIAL COMMERCE REVENUES EARLY ON 34
FIGURE 22: FACEBOOK’S US PAGE VIEWS TRANSLATE INTO MORE CLICKED ADS, MORE AD REVENUE 39
FIGURE 23: LARGE, GLOBAL BRANDS ARE SCALING UP THEIR INVESTMENT IN FACEBOOK ADVERSITING AND MARKETING 41
FIGURE 24: FACEBOOK SOLICITING USER FEEDBACK REGARDING AD RELEVANCE 42
FIGURE 25: FACEBOOK’S NEW SPONSORED STORIES AD FORMAT – THE POWER OF PERSONAL RECOMMENDATION 42
FIGURE 26: NEW AD FORMATS – FACEBOOK QUESTIONS AS INTERACTIVE ADVERTISEMENTS 45
FIGURE 27: OPENTABLE’S MOTHER OF ALL FOODIES GIVEAWAY PROMOTION ON FACEBOOK 46
FIGURE 28: FISHVILLE, A ZYNGA GAME ON FACEBOOK 48
FIGURE 29: POTENTIAL ADDITIONAL REVENUE DRIVERS 52
FIGURE 30: POTENTIAL ADDITIONAL REVENUE DRIVERS, CONTINUED 53
FIGURE 31: MOBILE PLATFORMS ON WHICH THE FACEBOOK APP CAN BE INSTALLED 55
FIGURE 32: FACEBOOK CREDITS PRICING SCHEME 56
FIGURE 33: MOBILE PLATFORMS ON WHICH THE FACEBOOK APP CAN BE INSTALLED 58
FIGURE 34: STREAM WARNER BROTHERS MOVIES OVER FACEBOOK, PAY WITH FACEBOOK CREDITS 59
FIGURE 35: FACEBOOK ALREADY OFFERS STREAM OR DOWNLOAD OPTIONS FOR MUSIC; CREDITS CAN TURN THIS INTO A REVENUE GENERATOR 60
FIGURE 36: STREAM WARNER BROTHERS MOVIES OVER FACEBOOK, PAY WITH FACEBOOK CREDITS 62
FIGURE 37: GOOGLE’S “ADVANCED SEARCH” 64
FIGURE 38: FACEBOOK’S INVESTMENT FUNDING 67
FIGURE 39: SOCIAL FEATURES IN GOOGLE SEARCH RESULTS 70
FIGURE 40: AN ILLUSTRATION OF GOOGLE’S +1 71
FIGURE 41: EARLY STAGES FOR FACEBOOK PLACES / FACEBOOK DEALS MASHUP 72
FIGURE 42: FACEBOOK TIMELINE 73
FIGURE 43: MEMBERSHIP BREAKDOWN BY COUNTRY 78
FIGURE 44: TOP TEN COUNTRIES BY TOTAL FACEBOOK USERS 79
FIGURE 45: FACEBOOK REPRESENTATION OF TOP TEN COUNTRIES, BY TOTAL POPULATION 79
FIGURE 46: TOP TEN COUNTRIES (OVER 1 MILLION POPULATION) BY PERCENT OF POPULATION ON FACEBOOK 80
FIGURE 47: PATENTS ALREADY GRANTED 81
FIGURE 48: PATENTS APPLIED, NOT YET GRANTED 82
For more information about this report or to purchase full, individual reports or annual subscriptions,
please call GreenCrest Research at (212) 607‐5456 or email us at research@greencrestcapital.com

Facebook
19 May 2011
About GreenCrest Capital
Our Research Methodology
GreenCrest Capital provides clients with accurate, timely and innovative research into the companies and sectors we cover. To that end
we established an experienced team of analysts, researchers, economists and industry veterans that focus exclusively on private
companies with a proven track record of success. Producing quality research on a private company is uniquely challenging. Our analysts
utilize forensic analytical methods to obtain between 70 and 100 proprietary data points within each company. Our analysts
communicate with employees, ex‐employees, early investors, VCs, competitors, suppliers and others to gather valuable information
about the company under coverage. This information enables us to create unique financial models that value the underlying company
and provide insight to our clients and industry experts, leveraging years of experience working for bulge bracket firms.

GreenCrest Capital reports include business and financial aspects of late‐stage companies. These reports include but are not limited to
industry overviews, competitor analyses, SWOT analysis, products (existing and in development), management and key directors, risks
and concerns, other propriety channels, historical financials, revenue projections, valuations (using various matrices and valuation
recommendation), waterfall analysis, and a capitalization table.

About the Analysts
A.B. Mendez has over 11 years of equity research and consulting experience with private and public companies in the Internet Media,
E‐Commerce and software‐as‐a‐service (SAAS) sectors. Prior to joining GreenCrest he was a Senior Equities Analyst at Twin Red Asset
Management where he researched public and private companies across a range of industries and constructed a portfolio of long and
short positions. Prior to that Mr. Mendez was an Internet equity research analyst at Bank of America, Friedman Billings Ramsey (FBR), and
Thomas Weisel Partners. His operational and entrepreneurial experience includes independent E‐Commerce and database consulting,
working on multiple Internet startups, and serving as Director of Operations at Web software firm, Whiteboard Labs. Mr. Mendez earned
a BA in Economics and Political Science from Rice University, and is a member of the CFA Institute and the New York Society of Security
Analysts (NYSSA).

Nitsan Hargil, CFA, has more than 15 years of experience as an analyst in the technology and financial services industries. Mr. Hargil
specialized in artificial intelligence research, security software, and network management software and systems. Prior to GreenCrest
Capital, Mr. Hargil's Wall Street career includes research analyst positions at Lehman Brothers, Kaufman Brothers, and Friedman Billings
Ramsey (FBR). He is known for successfully integrating his deep understanding of technology with extensive channel checks to provide
credible, objective research. Mr. Hargil was recognized as a top analyst in The Wall Street Journal "Best On The Street" awards for best
stock picking in software. He was ranked by StarMine as second (out of more than 100 analysts) in software EPS accuracy for three years
in a row. Mr. Hargil frequently appeared on CNBC, CNN, CNNfn, Bloomberg TV, and other financial news shows and has been quoted for
his expertise in identifying and analyzing industry trends in leading publications such as The Wall Street Journal, Investor's Business Daily,
The New York Times, The Washington Post, Fortune, and Business Week. Mr. Hargil is a member of the CFA Institute and the New York
Society of Security Analysts (NYSSA). He received his M.B.A. from the Anderson School at UCLA.


Facebook
19 May 2011
Disclaimer

GreenCrest Capital Management LLC (Hereafter “GreenCrest”) does and seeks to do business with companies covered in this research
report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision. This document does not
contain all the information needed to make an investment decision, including but not limited to, the risks and costs.
Additional information is available upon request. Information has been obtained from sources believed to be reliable but GreenCrest or
its affiliates and/or subsidiaries do not warrant its completeness or accuracy. All pricing information for the securities discussed is derived
from public information, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are
subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or
solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account
individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial
instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any
securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company
specific developments or announcements, market conditions or any other publicly available information.
Copyright 2011 GreenCrest Management LLC. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed, in whole or in part, without the written consent of GreenCrest Capital.

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