Facebook’s Future: F-Commerce – Unleashing the Power of Personal Recommendations

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GreenCrest Capital today released an in-depth research and valuation report on Facebook Inc. With more than 650 million active users worldwide, we expect Facebook will generate $4.86 billion in revenues in 2011. Based on our four-way analysis, we currently value the company at $89 billion.

GreenCrest Capital

GreenCrest Capital

Facebook Credits will unlock the power of the personal recommendation and drive transactions in paid music, video, and other services...

GreenCrest Capital today released an in-depth research and valuation report on Facebook Inc. With more than 650 million active users worldwide, we expect Facebook will generate $4.86 billion in revenues in 2011. Based on our four-way analysis, we currently value the company at $89 billion.

Having thoroughly researched and analyzed data released by the company, information gathered from interviews with current and past employees, investors, competitors and industry experts, GreenCrest compiled a comprehensive 86-page report and valuation analysis.

Key points from our report:

  • 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 truly is a 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.
  • 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 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 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 margins over the long term, as the company continues to diversify its business.
  • We expect that the Credits program will act as an accelerator to unlocking the power of the personal recommendation as a tool to drive transactions in paid music, video, and a range of products and services that can be sold over its platform by partners who would in turn pay FB a commission for each transaction.
  • Risks: Competition will always be intense, and there is always the chance that someone builds a better mouse trap. However, users have invested a great deal of time in building out their networks on FB, and have uploaded over 60 billion photos, multiples of the uploads seen on longer-established photo sharing web sites. Facebook’s extensive patent portfolio (we analyze within) is another barrier.
  • Valuation: Facebook has high margins (operating margin estimated at 48% in 2010) and very strong revenue growth. We expect that the company will continue to trade at high multiples (e.g., 10x forward revenues) for the foreseeable future, unless/until there is 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 price-to-sales, price-to-EBITDA, and two DCF scenarios.

GreenCrest 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. .

About the Analysts

A.B. Mendez, CFA, has over 11 years of experience as an Internet and software-as-a-service (SAAS) equity research analyst at Bank of America, Friedman Billings Ramsey (FBR), and Thomas Weisel Partners, as well as in business intelligence and strategy consulting. 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. 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.

To inquire about our research services, please call us at: (212) 607-5456 or email research(at)greencrestcapital(dot)com

For media inquiries, please contact AB Mendez, CFA, Senior Equity Analyst, at (212) 607-5456 or ABM(at)greencrestcapital(dot)com

GreenCrest Capital Management LLC
100 Wall Street, 8th Floor
New York, NY 10005

Follow GreenCrest Capital at http://twitter.com/#!/GreenCrestCap and A.B. Mendez at http://twitter.com/#!/abmendez

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