By the numbers: Facebook – April 2014

Facebook surprises again.

In my previous post on Facebook, I had updated my forecasts and value for Facebook based on the key metrics that Facebook uses based on quarterly earnings from December 2013. Last week FB announced its Q1 2014 earnings and surprised everyone. Here is the updated numbers and trends along with my forecasts.

As mentioned in my different previous posts, I have also started documenting how much growth can be attributed to FB's technology. This is an evolving aspect of my analysis and I will share as soon as ready. Meanwhile lets looking at the latest growth in FB based on Q1 2014 earnings report. 

The basis of growth

As mentioned in my previous posts, Facebook measures its business in terms of a few key metrics.

These are

1. Monthly Active Users (MAU): Users that access their account atleast once a month, on mobile or on a PC.
2. Daily Active Users (DAU): Users that access their account once a day, on mobile or on a PC.
3. Ratio of DAU/MAU: This provides a metric on engagement and ofcourse an opportunity for Facebook to earn revenue.
4. Advertising Revenue: Revenue earned by click or view only ads, similar to Google
5. Payment and Fee Revenue: Amount paid for by users for stuff like games, Facebook currency and so on.
6. Social Revenue: Money earned by Facebook through new social engagements like sending gifts and priority posts
7. Average Revenue Per User: Average money earned per user as a percentage of Monthly Active Users

Projecting the engagement

I had earlier conservatively projected the numbers for the next few quarters, and then using these quarterly projections, I had projected the revenue over the next few years. In my previous post, April 2014 values were predictions. In the latest post, these have been replaced with actual figures posted by Facebook.

In the following graphs, the blue values are actuals and pink values are projections. As you can see, I have put my estimates and actuals for the latest quarter next to each other, to highlight the difference between my estimates and up and down surprises from Facebook.

First, we start with Daily Average Users. A clear trend of number of users increasing quarter over quarter across all geographies.

Next monthly average users increasing each quarter as well, more rapidly in Asia and Rest of the World compared to Europe and US & Canada.

Next we can see the Quarterly revenue numbers

Finally, we have Average Revenue Per User

Looking at the data in tabular format

		Mar 30, 13	Jun 30, 13	Sep 30, 13	Dec 30, 13	Mar 30, 14	Mar 30, 14	Jun 30, 14	Sep 30, 14	Dec 30, 14	Mar 30, 15
US and Canada						(Est)	(Actual)
Internet Population (in millions)	MAU (in millions)	195	198	199	201	202	202	203	204	205	206
273	DAU (in millions)	139	142	144	147	149	150	152	153	154	155
Total Population (in millions)	DAU/MAU	71.28%	71.72%	72.36%	73.13%	73.75%	74.26%	75%	75%	75%	75%
347	Adv. Revenue (in millions)	$552	$721	$832	$1,068	$1,301	$1,039	$1,224.38	$1,309.06	$1,359.64	$1,387.43
	Payment+Fee (in millions)	$127	$127	$130	$138	$136	$140	$140	$141	$143	$143
	Social Revenue (in millions)	$0	$0	$0	$0	$1	$0	$1.00	$1.26	$1.58	$1.97
	Total Revenue (in millions)	$679	$848	$962	$1,206	$1,438	$1,179	$1,365	$1,452	$1,504	$1,532
	ARPU	$3.50	$4.28	$4.83	$6.00	$6.44	$5.85	$6.03	$6.42	$6.63	$6.74
Europe
Internet Population (in millions)	MAU (in millions)	269	272	276	282	286	289	295	301	307	313
518	DAU (in millions)	179	182	188	195	200	203	210	218	226	234
Total Population (in millions)	DAU/MAU	67%	67%	68.12%	69.15%	70.02%	70.24%	71%	72%	74%	75%
739	Adv. Revenue (in millions)	$367	$451	$482	$658	$802	$631	$740.30	$794.15	$831.72	$866.16
	Payment+Fee (in millions)	$56	$54	$56	$69	$63	$67	$67	$71	$75	$76
	Social Revenue (in millions)	$0	$0	$0	$0	$1	$0	$1.00	$1.27	$1.62	$2.06
	Total Revenue (in millions)	$423	$505	$538	$727	$867	$698	$809	$866	$908	$945
	ARPU	$1.57	$1.86	$1.95	$2.58	$2.80	$2.44	$2.51	$2.64	$2.71	$2.77
Asia
Internet Population (in millions)	MAU (in millions)	319	339	351	368	384	390	407	426	445	463
1034	DAU (in millions)	167	181	189	200	211	216	228	242	256	270
Total Population (in millions)	DAU/MAU	52%	53%	53.85%	54.35%	55.01%	55.38%	56%	57%	58%	58%
3922	Adv. Revenue (in millions)	$176	$225	$255	$318	$279	$333	$328	$358	$387	$403
	Payment+Fee (in millions)	$21	$22	$23	$23	$26	$21	$26	$27	$28	$29
	Social Revenue (in millions)	$0	$0	$0	$0	$1	$0	$1.00	$1.29	$1.66	$2.13
	Total Revenue (in millions)	$197	$247	$278	$341	$306	$354	$355	$386	$416	$435
	ARPU	$0.62	$0.73	$0.79	$0.93	$1.02	$0.93	$0.99	$1.09	$1.19	$1.29
Rest of the world
Internet Population (in millions)	MAU (in millions)	327	346	362	376	392	395	411	428	445	462
469	DAU (in millions)	180	195	208	216	229	233	246	260	275	289
Total Population (in millions)	DAU/MAU	55%	56%	57.46%	57.45%	58.25%	58.99%	60%	61%	62%	63%
2009	Adv. Revenue (in millions)	$150	$202	$229	$300	$252	$261	$287	$309	$333	$340
	Payment+Fee (in millions)	$9	$11	$9	$11	$11	$9	$12	$12	$12	$13
	Social Revenue (in millions)	$0	$0	$0	$0	$1	$0	$1.00	$1.29	$1.66	$2.13
	Total Revenue (in millions)	$159	$213	$238	$311	$264	$270	$299	$322	$347	$355
	ARPU	$0.49	$0.62	$0.66	$0.83	$0.93	$0.70	$0.74	$0.82	$0.87	$0.93
Worldwide
	MAU (in millions)	1100	1155	1189	1228	1265	1276	1,316	1,358	1,402	1,444
	DAU (in millions)	665	699	728	757	784.83	802	837	875	916	956
	DAU/MAU	60.45%	60.52%	61.23%	61.64%	62.04%	62.85%	64%	64%	65%	66%
	Adv. Revenue (in millions)	$1,245	$1,599	$1,798	$2,344	$2,635	$2,344	$2,580	$2,771	$2,911	$2,997
	Payment+Fee (in millions)	$213	$214	$218	$241	$236	$237	$245	$251	$258	$261
	Social Revenue (in millions)	$0	$0	$0	$0	$4	$0	$4	$5	$7	$8
	Total Revenue (in millions)	$1,458	$1,813	$2,016	$2,585	$2,875	$2,501	$2,828	$3,027	$3,176	$3,266
	ARPU	$1.33	$1.57	$1.70	$2.11	$2.27	$1.96	$2.15	$2.23	$2.27	$2.26
Total Quarterly Revenue		$1,458	$1,813	$2,016	$2,585	$2,875	$2,501	$2,828	$3,027	$3,176	$3,266

Valuation

Based on the above projections, the intrinsic value of the stock seems to be $42.76.

Here are some key assumptions

1. Terminal Value of the stock is reached in Year 6
2. Revenue increases Year over Year till Year 6 is based on individual growth rates in each geography. The MAU and DAU increase till they cap at 75% of the Total Internet users in each geography.
3. Cost of Revenue is a rolling percentage of the Revenue based on historic averages
4. Operating expense needs to cover the Tax burden from the $2.11 B tax liability that will be settled in the next 3 years. It matches historic averages after that.
5. Annual Depreciation is $500M except Year 3 when it is $1B
6. Tax rate is 30% each year except next 2 years when its 41 and 35% respectively.
7. Most importantly, the annual revenue is based on the growth in each market based on DAU, MAU and ARPU growth/ decline. .
8. Beta is 1.772 as per the latest numbers
9. Debt Financing Rate is 1.46%
10. Equity Financing Rate is 6.3%
11. Terminal Value estimates
    1. Growth becomes 2% after Year 5
    2. Alternatively, stock price stabilizes at 9.5 P/E based on Year 5 revenue.
    3. Actual Terminal value was mid point between these 2 estimates

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	FY 2013-2014	FY 2014-2015	FY 2015-2016	FY 2016-2017	FY 2017-2018	FY 2018-2019
Annual Revenue	$7,872,000	$11,541,670	$13,302,224	$14,382,999	$15,503,443	$16,488,416
Cost of Revenue	$1,875,000	$2,749,064	$3,168,403	$3,425,829	$3,692,703	$3,927,309
Operating Expense	$3,193,000	$3,033,350	$3,640,020	$2,793,019	$2,653,368	$2,520,700
Total Other Income/ Expenses Net	$6,000	$20,000	$20,000	$20,000	$20,000	$20,000
Total costs	$5,068,000	$5,782,414	$6,808,423	$6,218,848	$6,346,071	$6,448,009
Net Income	$2,810,000	$5,779,256	$6,513,801	$8,184,151	$9,177,372	$10,060,407
Depreciation	$1,011,000	$1,000,000	$2,000,000	$1,000,000	$1,000,000	$1,000,000
EBIT	$2,810,000	$5,779,256	$6,513,801	$8,184,151	$9,177,372	$10,060,407
EBITDA	$3,821,000	$6,779,256	$8,513,801	$9,184,151	$10,177,372	$11,060,407
Tax rate	46.00%	40.00%	30.00%	30.00%	30.00%	30.00%
EBITDA X (1 – Tax rate)	$2,063,340	$4,067,554	$5,959,661	$6,428,906	$7,124,160	$7,742,285
Capital Expenditure	$1,362,000	$2,000,000	$4,000,000	$1,000,000	$500,000	$500,000
Delta Net Working Capital	$100,000	$1,053,000	$100,000	$100,000	$100,000	$100,000
Free Cash Flow	$1,612,340	$2,014,554	$3,859,661	$6,328,906	$7,524,160	$8,142,285
Beta		1.77
Debt Financing Rate		1.46%
Equity Financing Rate		6.30%
Discount Rate		12.62%
Assumed Discount Rate		12.62%
Number of outstanding shares		2,407,000,000
EPS		2.40
FCF per Share		0.84
NPV@10.28% of FCF's Year 1 to Year 6		26,454,129
Terminal Value Estimates
Perpetual Growth at 3%		$91,613,834
Shareprice at time of Analysis		56.75
Current P/E using GAAP Diluted EPS		246.74
Current P/E using Non-GAAP Diluted EPS		157.64
Assumed PE of	20	$220,378,594
Assumed Terminal Value		$155,996,214
PV of Terminal Value		$76,457,645
Total Value		$102,911,774
Estimated Value Per Share		$42.76
Projected Earnings Per Share		$10.99

Here is how the valuation would vary based on the long term P/E ratios the market wants to give

Projected EPS	$2.40
Average Revenue Growth over next 5 years	1.22
Market P/E	48.50
Stock price	$116.45

Conclusions

The stock has an intrinsic value of $42.76 which is quite sensitive to the stock's Beta at 1.77. If the volatility comes down the stock price will most likely go up. But the growth rate sustained at 22% or higher per year may push the stock all the way to $116.50 or higher.