Rick Summer, Senior Stock Analyst, Morningstar, talks to B&E's Amir Moin about the future prospects of the world's largest online social network
B&E: Do you think Facebook will be able to innovate on its business model with all the money it has raised from the IPO. If yes, how?
Rick Summer (RS): Facebook announced a new service called Facebook Exchange that allows advertisers to capture information about users’ browsing history and employ real time bidding strategies for more relevant ads on the Facebook website. The service is set to launch in the next few weeks. In our view, this service signals the most consistent trend that we expect for Facebook’s future – the company will need to continue investing in deep technology solutions to maximize the value of its user base to advertisers. Moreover, the company will need to marry the capabilities of ad formatting, measurement, relevancy, and reach for advertisers in order to achieve our forecast growth rates and continue the shift of advertising dollars from offline media to Facebook.
B&E: In its disclosures before the IPO, Facebook made it clear that revenue growth had declined from 155% to 45% and will continue to decline. What are your views on Facebook’s current business model. Do you think Mark Zuckerberg rushed with the entire IPO thing?
B Facebook’s platform capabilities provide important assets for growth and competitive advantage. We believe optimism is warranted, but the market may not appreciate several near-term challenges facing the company. First, there is a lack of best practices for advertisers to measure the return on their advertising dollar. In our research, advertisers and agencies have commented that the lack of standards or clear returns on investment in running social advertising campaigns presents a challenge, although the massive user base is too compelling to ignore. However, if agencies and advertisers are not able to develop acceptable tools for measurement, growth in social advertising may stall and the value of Facebook will be as generic as any other website that drives traffic.
B&E: How do you value the stock at the moment. What do you expect from Facebook in terms of growth and profitability?
RS: We value Facebook at $32 per share, representing an enterprise value of approximately $71 billion. Our valuation represents a multiple of 59 and 71 times our 2012 earnings per share and free cash flow estimates, respectively. In modeling the company, we forecast 10 years of financial statements. Admittedly, there is a great deal of uncertainty about the ultimate growth trajectory and profit profile of the company, but the exercise is important to us for several reasons. First, we believe the company will reach its structural maturity within 10 years, whereby it has normalised operating margins and cash flow yields. Second, understanding the size of the revenue opportunity at the end of our explicit forecast period helps quantify our level of optimism about the firm’s revenue potential. While we would not feel comfortable about our level of precision in forecasting the absolute level of revenue in three years, we do think our 10-year forecast results in a fair representation within a range of possible outcomes.
B&E: Do you think Facebook will be able to innovate on its business model with all the money it has raised from the IPO. If yes, how?
Rick Summer (RS): Facebook announced a new service called Facebook Exchange that allows advertisers to capture information about users’ browsing history and employ real time bidding strategies for more relevant ads on the Facebook website. The service is set to launch in the next few weeks. In our view, this service signals the most consistent trend that we expect for Facebook’s future – the company will need to continue investing in deep technology solutions to maximize the value of its user base to advertisers. Moreover, the company will need to marry the capabilities of ad formatting, measurement, relevancy, and reach for advertisers in order to achieve our forecast growth rates and continue the shift of advertising dollars from offline media to Facebook.
B&E: In its disclosures before the IPO, Facebook made it clear that revenue growth had declined from 155% to 45% and will continue to decline. What are your views on Facebook’s current business model. Do you think Mark Zuckerberg rushed with the entire IPO thing?
B Facebook’s platform capabilities provide important assets for growth and competitive advantage. We believe optimism is warranted, but the market may not appreciate several near-term challenges facing the company. First, there is a lack of best practices for advertisers to measure the return on their advertising dollar. In our research, advertisers and agencies have commented that the lack of standards or clear returns on investment in running social advertising campaigns presents a challenge, although the massive user base is too compelling to ignore. However, if agencies and advertisers are not able to develop acceptable tools for measurement, growth in social advertising may stall and the value of Facebook will be as generic as any other website that drives traffic.
B&E: How do you value the stock at the moment. What do you expect from Facebook in terms of growth and profitability?
RS: We value Facebook at $32 per share, representing an enterprise value of approximately $71 billion. Our valuation represents a multiple of 59 and 71 times our 2012 earnings per share and free cash flow estimates, respectively. In modeling the company, we forecast 10 years of financial statements. Admittedly, there is a great deal of uncertainty about the ultimate growth trajectory and profit profile of the company, but the exercise is important to us for several reasons. First, we believe the company will reach its structural maturity within 10 years, whereby it has normalised operating margins and cash flow yields. Second, understanding the size of the revenue opportunity at the end of our explicit forecast period helps quantify our level of optimism about the firm’s revenue potential. While we would not feel comfortable about our level of precision in forecasting the absolute level of revenue in three years, we do think our 10-year forecast results in a fair representation within a range of possible outcomes.
For More IIPM Info, Visit below mentioned IIPM articles
2012 : DNA National B-School Survey 2012
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
IIPM : The B-School with a Human Face
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
IIPM : The B-School with a Human Face
