Photo: World Economic Forum
Weeks ahead of its IPO, Facebook’s valuation on private markets is above $100 billion. Capstone Investments analyst Rory Maher thinks that’s too high.
- Decelerating Revenue Growth. According to the recently filed S1 amendment, Facebook revenue grew 45% in 1Q12 versus 55% in 4Q11, 104% in 3Q11, and 108% in 2Q11. We believe it is unlikely that meaningful re-acceleration of revenue will occur this year as there are not many indications the Company will release a meaningful number of new premium ad products.
- Growth Investments Hurting Near-Term Profits. The Company reported a free cash flow loss of -$12M in 1Q12 versus a gain of $192M in 1Q11, driven by a significant increase in capital expenditures [“capex”] related to building data centres and storage capability. Capex at 43% of revenue is higher than we expected and we believe there could be more investment in the future due to growth in emerging markets. As a result, we are assuming a more gradual step down in capex through 2016.
- Lowering Revenue Forecast Due To Less Than Expected Traction From Premium Ads. We lower our annual revenue growth rate from 2012E-2016E to 32% from 43% as we believe sellout of premium inventory is growing at a lower-than-expected rate since many otherwise premium advertisers are finding comparable ROI on the cheaper self-serve marketplace ads. We believe this could be a long-term issue.
- Lower EBITDA Margin Forecast. The Company reported higher-than-expected expense margins across most lines, with the largest increased coming from sales and marketing and product development. We continue to believe the Company will scale its expenses as it grows in overseas markets, but this could be more gradual than expected. As a result, we currently forecast 59% EBITDA margins in 2016E versus our previous forecast of 64%.
- $90 Billion Valuation. We value Facebook at $90 Billion following changes in our long-term outlook vs. a previous range of $75B-$110B. We use a combination of DCF and EV/EBITDA multiples to determine our target (see Figure 3).
Our take: It’s unclear that Mark Zuckerberg – and therefore Facebook, which he unilaterally controls – cares enough about making money to be a $100 billion company. We’re not sure Zuckerberg would disagree or care.