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Thursday, February 2, 2012

Facebook - the details

Everyone is talking about it, and has given their two cents. Plenty are showing what the company already produced, but below are future projections and interesting facts about their growth prospects.

First interesting observation is seasonality. When looking at the growth trends, we can see a sense of seasonality.

Sept and March being the low growth quarters, while June and December being the higher growth quarters.

Second, zero revenue from mobile. From the S-1:

"Facebook app is the most frequently downloaded app across all major smartphone platforms in the United States. We had more than 425 million MAUs who used Facebook mobile products in December 2011. We currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through our mobile products"

This can potentially be a good source of growth for both its business segments (ads and payments).

Third, year-over-year growth is decelerating, and below 100%. This does not justify a trailing multiple of +100 on the company.

The third observation highlights where the company has been. But where is the company going to go? In October 2010, a techie wrote a pretty detailed article pointing out Facebook's potential growth, and how it will be a larger company than Google within 5 years.

The article is fairly relevant with respect to advertising and credits, and how the facebook platform can be used to juice both segments. However, the 'Groupon' comparison was shot dead as Facebook exited the business.  But the article suggests Facebook will have near or over $28billion dollars in revenue by 2015.  Since the author is the experienced techie, I used his assumption as the potential base case for growth projections.

Below is a chart of revenue growth from 2009 to 2011, and what they will be.

If we assume margins to remain fairly consistent, then operational income should see similar growth trends. Is this growth trend reasonable? I do not know yet.

What I am looking for:

1. Progress on the mobile front. The current transition from PC to mobile is currently causing a hiccup in Google, and with no mobile ads on FB, it will definitely cause a hiccup for FB if their "sponsored" news feeds do not produce the same revenue as the PC ads.

2. Expansion of the platform. More retailers and video rentals etc.

3. Credits to be used as a viable mobile payment alternative.

The revenue projections suggests a company that should be trading with a multiple below 70, and shrink throughout the 5 years. (Although we may see a +100% growth spurt in 2012 if they truly monetize mobile this year.)

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