1.) In adopting a strategy that offered free corporate profile pages for businesses to inform the public about their products as well as invite them to comment with responses, Facebook could grow their advertising revenue by about 90%. With its huge customer base, which surpassed 800 million in 2011, the advertising success story has remained unmatched. Facebook has continued to attract people from all works of life and importantly has a non-US market base of over 75 per cent. This, in turn, provides opportunities for businesses to continue to target this growing user base.
With such unique features offered by the platform, it presented better advertising strategies than what traditional advertising strategies could offer. Newsfeed advertising and notification of friends’ activities has worked in growing the network of users a company can tap into. The social beacon feature also gained acceptance with the ‘opt-in’ option taking off with users having control of what information of advertising they wished to see.
Deploying two different advertising modes as Social Ads with Facebook pages ensured a consistent growth in advertising market share for the platform. Integrating other features such as likes and sharing helped businesses understand users interests more. The comments feature also acts in the form of a market survey with users sharing their thoughts on product features and thus, enabling companies modify products per users’ feedback. Newer features have also enabled to platform increase user engagement time and businesses can leverage on this to share their advertisements with a larger user base.
As internet advertising means lesser cost to businesses, the added advantage of quality data on user demographics is not also lost on businesses. Environmental friendly companies have also embraced advertising on the platform as it is well suited to their belief in sustainability, asides other benefits. This further drove the growth and expansion experienced.
2.) This platform was developed as a set of tools for third party developers to develop applications with the Facebook environment. While a small number of applications accounted for most of the usage initially, Facebook proceeded to allow developers start to generate some sort of revenue to be able to cover their costs. This step attracted more developers to the platform and helped to boost site traffic. With this increased popularity, came a higher substantial revenue from social gaming. The launch of Farmville by Zynga in 2009 also helped further boost the growth of the gaming industry as the game became quite popular on Facebook. The next game Zynga launched in 2011, was even bigger than Farmville and went on to attract over 250 million users per month, an average of 45 million users per day.
Facebook also proceeded to launch a second-generation platform, Facebook for Websites (originally billed as Facebook Connect), offering the same capabilities as the platform itself but enabling developers to go ahead to integrate features from the platform into third party websites. This new platform offered different functionalities for different users, and could be accessed by non-platform users and platform users alike. With a platform user opting in to connect with Facebook, their activities are then shared with their connected friends on Facebook. What this meant was that third parties could use this to obtain substantial data about Facebook users which further helped their businesses grow as they now had a better understanding of the userbase. The network externalities to both users and businesses ensured these new platforms have gone on to be successes for Facebook. The precautions taken by the platform to ensure non-mishandling of user data also has worked. By 2012, Facebook for Websites was now integrated across 24.3 per cent of the global web. Other factors such as ease of use also triggered a wide acceptance amongst platform users and publishers.
3.) The Price Implied Expectations analysis heavily relies on value drivers and
determinants which help to explain its mechanics. The analysis in arriving at the valuation is achieved in four steps – calculation of free cash flow, valuation of non-operating assets, calculation of market value of equity and determination of market-implied forecast period.
Calculating the net operating profit after tax for 2012, gives us $350 million, if we assume a cash tax rate of 35% and revenue figures as given in exhibits from the case. Free cash flow (FCF) is then calculated as equals net operating profit after tax (NOPAT) – investments in future growth. Once we have calculated projected future Free Cash Flows, we then calculate the value of Facebook’s non-operating assets and its liabilities.
Proceeding further, equity market value is evaluated, given the share price and the number of outstanding shares as, $28 and 2.74 billion outstanding shares, respectively. To calculate the market-implied forecast period, we determine the present value of Facebook’s free cash flows (already calculated), using the company’s assumed WACC of 10%. The forecast period is stretched and in doing so, we determine at what point the current stock price will be matched. We also assume a residual value set at a perpetuity for our calculation and inflation at a 2 per cent flat rate. Facebook’s value at the end of 2012 is estimated to be just over $6 per share, increasing until it reaches the $28 stock price by 2024, just going onto the 13th year. With this, we see that Facebook’s market-implied forecast period is just over 12 years.
From above, we can see that the idea of price-implied expectations presents an approach
through which Facebook’s intrinsic value is derived while ignoring important information that could be embedded within current stock prices. This analysis also works to present implied parameters from current market value. Whatever view held by different investors on efficient markets, prices will always reflect public and private market information. The only thing is that individual investors may have differing views on a firm value based on their interpretation of whatever public or private information they are privy to at that point in time.
- Blodget, Henry. “By The Way, Facebook Is Now Worth $65 Billion, Not The ‘$50 Billion’ Everyone Thinks…”. Business Insider, 2017. http://www.businessinsider.com/facebook-shares-outstanding-2012-7.
- “Expectations Investing”. Expectationsinvesting.Com, 2017. http://expectationsinvesting.com.
- “Facebook Inc. (FB) | Debt”. Stock Analysis On Net, 2017. https://www.stock-analysis-on.net/NASDAQ/Company/Facebook-Inc/Analysis/Debt.
- “Facebook Inc. (FB) | Operating Leases”. Stock Analysis On Net, 2017. https://www.stock-analysis-on.net/NASDAQ/Company/Facebook-Inc/Analysis/Operating-Leases.
- “Facebook Price (FB)”. Ycharts.Com, 2017. https://ycharts.com/companies/FB/price.
- “Price-Implied Expectations Aka The Importance Of Reverse DCFs – Gurufocus.Com”. Gurufocus.Com, 2017. https://www.gurufocus.com/news/87216/priceimplied-expectations-aka-the-importance-of-reverse-dcfs.
- Rappaport, Alfred, and Michael J Mauboussin. Expectations Investing. Boston, Mass.: Harvard Business School, 2003.