Here is financial analysis of Facebook based on 2012, 2013 Annual reports, 2014 Q1, Q2 Quarterly reports. Comments are very welcome.

1. JENNIFER LI ESM-T2
Facebook Financial Analysis
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Executive Summary
May 18th 2012, 4 days after Mark’s 28th birthday, Facebook went IPO. The company was valued
at $104 billion, which was one of the biggest IPOs in technology and internet history. Almost
nobody believed it could go wrong before IPO, and many investors saw this as an opportunity of
second Google. However, opened at top end of $34 ~ $38 range, stock priced dropped drastically
and continued to crash in the next following 4 months to as low as $17. As a result, Facebook’s
market cap shrunk more than 50%, left early investors and Mark himself very disappointed. At
the same time, company was trapped in a number of lawsuits filed by its shareholders, who
believe there were material information not fully disclosed. Covered in gloomy atmosphere for 12
months, a few crucial strategic moves brought Facebook back to a $100 billion company. All the
indexes and ratios on quarterly reports indicated its healthiness and profitability. By now,
Facebook has reached $200 billion market cap and stock price hasn't stop surging. What led to
the price dip happened in 2012? What are the secret weapons that enabled Facebook to recover?
What are their revenue sources? Will this social media herald keep its healthy financial status in
the next several years?
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Facebook’s Background
In 2004, Facebook was founded by a 20-year-old Harvard student Mark Zuckerberg, initially
serving only Harvard students. Couple of months later, membership was expanded to all Ivy
League colleges then all universities in North America. In 2006, Facebook opened to everyone
over 13 years old with a valid email address. With the mission held - “make the world more open
and connected”, Facebook soon became world largest social media company. It reached 1 billion
monthly active users in September 2013, and kept 600 million daily active users on average.
Facebook users can be segmented to three categories: individuals who want to stay connected
with their friends and family; developers who use Facebook platform to reach users and build
products which can be more personalized; marketers who engage with customers and market
products or services based on user’s information.
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Web and mobile tools such as News Feed, Timeline, Graph Search, Messenger, Instagram are
provided to users to share, learn and explore. Since Facebook is intimately close to their users’
live, privacy and security concerns have never halted.
With more and more activities shifted from web to mobile, Facebook is expanding their power in
mobile reign, which has been proven to be successful.
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Current Financial Situation
Facebook’s revenue has been growing rapidly since 2010 according to public record, ranking 341
in Fortune 500. Trailing twelve months revenue by September 2014 is over 10 billion. Over past
5 years, it has always been profitable, even though net income in 2012 dimmed severely.
Revenue, Operating Income and Net Income
11000
8250
5500
2750
0
Revenue USD Mil
Operating Income USD Mil
Net Income USD Mil
Free Cash Flow USD Mil
2010 2011 2012 2013 TTM
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Facebook’s revenue is
composed by two parts:
advertising, payments and
other fees. Among these
two sources, advertising
revenue takes more than
80% and the percentage
has been increasing, which
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3. JENNIFER LI ESM-T2
makes it second-largest digital advertising company in U.S. following Google.
The increase on advertising revenue is mainly attributed to Facebook ads effectiveness. Different
from Google, Facebook ads can be limited to target only certain customers based on their
information. And cost for posting this ads is lower due to less competition, lower volume and high
relativity. According to Adobe’s first annual Social Media Intelligence Report, Facebook CPC
(costs per click) is down 40% year-over-year; while CTR (click-through rates) is up 275% year-over-
year4.
Facebook maintains very healthy margin and cash flow, which enables them to acquire innovative
startups with large user base and compete with key players in the market such as Google,
LinkedIn and Twitter. Gross margin over past 4 years was above 73%, higher than Google’s
60% average. Ordinary operating margin is 37%, even in a bad year as 2012, they managed to
keep it at 10%, exceeding both LinkedIn and Twitter.
Mobile
In Facebook’s 2012 Annual Report,
it was indicated that 50% of their
current revenue came from mobile.
They also stated in the risk factors
that revenue highly depend on
growth and engagement on mobile
devices. Though Facebook started to
run mobile ads in 2012 Q1, it was until Q3 when advertisers can purchase ads specifically on
mobile. This has significant influence on Facebook’s market performance. Facebook mobile ads
are clicked 13 times more, earning 11 times more money than its desktop ads6. After success on
mobile ads is proved, stock price surged back to list and kept climbing up.
Instagram
In April 2012, Facebook acquired Instagram - a photo sharing service mainly based on mobile
phones - for 1 billion US dollars, which was 1/5 of 2012 total revenue and was Facebook’s largest
acquisition by then. Although there was come controversies within stockholders, exponential
growth of Instagram user didn’t let them down. In June 2013, the service has total 16 billion
photos with 1 billion likes per day.
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4. JENNIFER LI ESM-T2
Grow or not?
Facebook experienced a severe stock market earthquake right after IPO, when all 4 major banks
pulling out seeing the price rolling down. Suspicion of whether Facebook can win the
competition in mobile ads market also raised some concerns among investors. Successfully
survived in this earthquake and kept bottom line of profit margin, Facebook proved their
capability in both technology competency and financial management. ROA and ROE keep rising
ever since over each quarter, so as their stock price.
Acquisition of WhatsApp indicated Facebook’s plan of attacking private messaging market. The
$16 billion deal was highly controversial and is still under discussion. Whether Facebook can keep
its rapid growth is highly dependent on whether they can successfully monetize this new
component.
Competition in social media and digital advertising market is fierce. Facebook is no doubt in a
leading position in former. However, Google has never stopped trying to take over. As shown in
below chart, the two lines of engagement level between the two player is getting closer. Keep user
engagement, improve user experience, lower cost and improve effectiveness on ads are crucial for
Facebook’s next battle. As stated in 2013 Annual Report, global expansion is also vital to win next
billion user.
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5. JENNIFER LI ESM-T2
DuPont Analysis
With short 4 years history, there’re not many evidences to predict Facebook’s growth trend except
for their strategic shifts. However, standing at current point, they are in a healthy financial
position with high gross margin, return on assets, return on equity, as well as cash flow.
Operational cash is 4.38 billion by June 2014, increased 30% comparing to December 2013.
Facebook maintains industrial average profitability in the past years. Other than 2012,
Facebook’s net margin is maintained steady at 18% level, which is very impressive for such
competitive industry, second only to Google.
Asset Turnover has been increasing since 2012, but still lower than Google’s 0.60 and LinkedIn’s
0.68. With proper management of assets, we can expect it to be higher.
Facebook is free from long-term debt since 2013. Debt/equity dropped from 0.17 to 0.02 from
2012 to 2013, which is positive. Financial leverage kept decreasing since 2010. It indicates that
the increase of ROE is mainly due to the rise of net margin and asset turnover, meaning that it’s
financial status is under proper management but not over-leveraged.
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Profitability 2010-12 2011-12 2012-12 2013-12 TTM
Net Margin % 18.85 18.00 0.63 18.94 23.66
Asset Turnover (Average) 0.66 0.80 0.47 0.48 0.55
Financial Leverage (Average) 1.93 1.48 1.28 1.16 1.13
Return on Assets % 12.44 14.33 0.30 9.04 12.98
ROE 24.05 22.91 0.40 10.95 15.44
Conclusion
Based on above analysis, we can conclude that Facebook is under a healthy and positive financial
stage with proper management and development. It should be able to keep growing by
maintaining investment in R&D and expanding globally. At the same time, we need to take into
account that the overall social media industry has been promising in recent years which may
correspondingly contribute to Facebook’s growth. Though the growth rate is already slowing
down, with next billion user in mind and a competent executive team, another leap lead by social
media herald is in the near future.
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Resources
1. Facebook 2012 Annual Report. From http://investor.fb.com/annuals.cfm
2. Facebook 2013 Annual Report. From http://investor.fb.com/annuals.cfm
3. Facebook Prices IPO at Record Value | Wall Street Journal (2012, May 17)
4. Social Media Intelligence Report | Adobe Digital Index (Q3, 2013)
5. Facebook Prices IPO at Record ValueThe 40 Most Important News Stories About Facebook
Since Its IPO | TechCrunch. (2012, July 26). From http://techcrunch.com/2012/07/26/
facebook-news/
6. They Work! Facebook Mobile Ads Are Clicked 13X More, Earn 11X More Money Than Its
Desktop Ads | TechCrunch (2012, June 19). From http://techcrunch.com/2012/06/19/
facebook-mobile-ads/
7. Investors file lawsuit against Facebook, Morgan Stanley. (2012, May 23). From http://
money.cnn.com/2012/05/23/technology/facebook-lawsuit/
8. Facebook’s top 10 from 2012: A big acquisition, a mobile hangover, and, oh, yeah, an IPO.
(2012, December 29). From http://venturebeat.com/2012/12/29/facebook-top-10-2012-
news/
9. Global Facebook Advertising Report Q2 2012 | TBG Digital (2012, June)
10. Social Login Trends Across the Web for Q2 2014 | Janrain. (2014, June 1). Retrieved from
http://janrain.com/blog/social-login-trends-q2-2014/
11. Why Facebook is a leading social media player. (2014, January 14). From http://
marketrealist.com/2014/01/facebook/
12. Must-know: Can Facebook survive its increasing competition? (2014, January 16). Retrieved
from http://marketrealist.com/2014/01/must-know-can-facebook-survive-increasing-competition/
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