By the numbers: Facebook at end of Q4 2013

Facebook moving along.

In my previous posts on Facebook, I had looked at Facebook results for June 2013. Accordingly, I had projected the Free Cash Flow for the firm in the years to come. I had come to the conclusion that the stock was slightly overpriced. The calendar has moved along and we are now waiting for Facebook to release March 2014 earnings in late April 2014. As we wait, it would be a good idea to baseline our estimates based on December, in preparation for figues coming out in April.

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, Sept and December 2013 values were predictions. In the latest post, these have been replaced with actual figures posted by Facebook.

		Sep 30, '13	Dec 30, '13	Mar 30, '14	Jun 30, '14	Sep 30, '14	Dec 30, '14	Mar 30, '15	Jun 30, '15
US and Canada
Internet Population (in millions)	MAU (in millions)	199	201	202	203	204	205	206	207
273	DAU (in millions)	144	147	149	151	153	154	155	155
Total Population (in millions)	DAU/MAU	72.36%	73.13%	74%	74%	75%	75%	75%	75%
347	Adv. Revenue (in millions)	$832	$1,068	$1,301.41	$1,372.96	$1,498.72	$1,596.65	$1,680.02	$1,705.47
	Payment+Fee (in millions)	$130	$138	$136	$138	$140	$141	$141	$142
	Social Revenue (in millions)	$0	$0	$1.00	$1.26	$1.59	$1.98	$2.48	$2.85
	Total Revenue (in millions)	$962	$1,206	$1,438	$1,512	$1,641	$1,740	$1,824	$1,851
	ARPU	$4.83	$6.00	$6.44	$6.76	$7.35	$7.79	$8.16	$8.24
Europe
Internet Population (in millions)	MAU (in millions)	276	282	286	291	296	301	306	311
518	DAU (in millions)	188	195	200	207	213	220	226	233
Total Population (in millions)	DAU/MAU	68.12%	69.15%	70%	71%	72%	73%	74%	75%
739	Adv. Revenue (in millions)	$482	$658	$802.37	$861.72	$948.80	$1,025.25	$1,110.77	$1,148.26
	Payment+Fee (in millions)	$56	$69	$63	$65	$69	$72	$72	$75
	Social Revenue (in millions)	$0	$0	$1.00	$1.27	$1.61	$2.05	$2.60	$3.02
	Total Revenue (in millions)	$538	$727	$867	$928	$1,019	$1,099	$1,186	$1,226
	ARPU	$1.95	$2.58	$2.80	$2.96	$3.20	$3.41	$3.63	$3.70
Asia
Internet Population (in millions)	MAU (in millions)	351	368	384	399	416	431	447	463
1034	DAU (in millions)	189	200	211	222	233	245	256	268
Total Population (in millions)	DAU/MAU	53.85%	54.35%	55%	56%	56%	57%	57%	58%
3922	Adv. Revenue (in millions)	$255	$318	$279	$306	$329	$348	$355	$375
	Payment+Fee (in millions)	$23	$23	$26	$27	$28	$29	$31	$32
	Social Revenue (in millions)	$0	$0	$1.00	$1.28	$1.65	$2.11	$2.70	$3.17
	Total Revenue (in millions)	$278	$341	$306	$334	$358	$379	$388	$410
	ARPU	$0.79	$0.93	$1.02	$1.11	$1.25	$1.40	$1.56	$1.74
Rest of the world
Internet Population (in millions)	MAU (in millions)	362	376	392	408	423	439	454	470
469	DAU (in millions)	208	216	229	240	251	263	275	287
Total Population (in millions)	DAU/MAU	57.46%	57.45%	58%	59%	59%	60%	61%	61%
2009	Adv. Revenue (in millions)	$229	$300	$252	$278	$298	$317	$321	$339
	Payment+Fee (in millions)	$9	$11	$11	$12	$12	$13	$14	$14
	Social Revenue (in millions)	$0	$0	$1.00	$1.28	$1.64	$2.10	$2.69	$3.15
	Total Revenue (in millions)	$238	$311	$264	$292	$312	$333	$337	$356
	ARPU	$0.66	$0.83	$0.93	$1.05	$1.22	$1.40	$1.63	$1.87
Worldwide
	MAU (in millions)	1189	1228	1,265	1,301	1,339	1,376	1,413	1,450
	DAU (in millions)	728	757	785	814	843	873	903	933
	DAU/MAU	61.23%	61.64%	62%	63%	63%	63%	64%	64%
	Adv. Revenue (in millions)	$1,798	$2,344	$2,635	$2,819	$3,074	$3,287	$3,466	$3,567
	Payment+Fee (in millions)	$218	$241	$236	$242	$249	$255	$258	$263
	Social Revenue (in millions)	$0	$0	$4	$5	$6	$8	$10	$12
	Total Revenue (in millions)	$2,016	$2,585	$2,875	$3,066	$3,330	$3,551	$3,735	$3,843
	ARPU	$1.70	$2.11	$2.27	$2.36	$2.49	$2.58	$2.64	$2.65
Total Quarterly Revenue		$2,016	$2,585	$2,875	$3,066	$3,330	$3,551	$3,735	$3,843

Valuation

Based on the above projections, the fair value of the stock seems to be $44.

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	Year 6
	FY '13-2014	FY 2014-2015	FY 2015-2016	FY 2016-2017	FY 2017-2018	FY 2018-2019	FY 2019-2020
Annual Revenue	$7,872,000	$12,831,845	$15,470,567	$16,539,783	$17,608,621	$18,616,172	$19,477,406
Cost of Revenue	$1,875,000	$3,056,365	$3,684,872	$3,939,544	$4,194,127	$4,434,111	$4,639,245
Operating Expense	$3,193,000	$3,033,350	$3,640,020	$2,793,019	$2,653,368	$2,520,700	$2,394,665
Total Other Income/ Expenses Net	$6,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000
Total costs	$5,068,000	$6,089,715	$7,324,892	$6,732,563	$6,847,495	$6,954,811	$7,033,910
Net Income	$2,810,000	$6,762,129	$8,165,675	$9,827,220	$10,781,126	$11,681,361	$12,463,496
Depreciation	$1,011,000	$1,000,000	$2,000,000	$1,000,000	$1,000,000	$1,000,000	$1,000,000
EBIT	$2,810,000	$6,762,129	$8,165,675	$9,827,220	$10,781,126	$11,681,361	$12,463,496
EBITDA	$3,821,000	$7,762,129	$10,165,675	$10,827,220	$11,781,126	$12,681,361	$13,463,496
Tax rate	46.00%	35.00%	30.00%	30.00%	30.00%	30.00%	30.00%
EBITDA X (1 – Tax rate)	$2,063,340	$5,045,384	$7,115,972	$7,579,054	$8,246,788	$8,876,953	$9,424,447
Capital Expenditure	$1,362,000	$2,000,000	$4,000,000	$1,000,000	$500,000	$500,000	$500,000
Delta Net Working Capital	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000
Free Cash Flow	$1,612,340	$3,945,384	$5,015,972	$7,479,054	$8,646,788	$9,276,953	$9,824,447
Beta	1.40	1.77
Debt Financing Rate	1.46%	1.46%
Equity Financing Rate	6.30%	6.30%
Discount Rate	10.28%	12.62%
Assumed Discount Rate	10.28%	12.62%
Number of outstanding shares	2,407,000,000	2,407,000,000
EPS	1.17	2.81
FCF per Share	0.67	1.64
NPV@10.28% of FCF's Year 1 to Year 6	28,913,770	32,442,999
Terminal Value Estimates
Perpetual Growth at 3%	$134,951,200	$106,000,357
Shareprice at time of Analysis	56.75	56.75
Current P/E using GAAP Diluted EPS	246.74	246.74
Current P/E using Non-GAAP Diluted EPS	157.64	157.64
Assumed PE of 20	$186,952,443	$194,940,737
Assumed Terminal Value	$160,951,821	$150,470,547
PV of Terminal Value	$89,477,811	$73,749,378
Total Value	$118,391,581	$106,192,377
Current Intrinsic Value Per Share	$49.19	$44.12

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

Projected EPS	$2.81
Average Revenue Growth over next 5 years	1.26
Market P/E	48.50
Stock price	$136.25

Conclusions

The stock has an intrinsic value of $44 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.