Facebook Initiation

North America Equity Research
27 June 2012
Initiation
Facebook
The Social Infrastructure of the Web; Initiating at Overweight with $45 Price Target
We are initiating coverage of Facebook with an Overweight rating and year-end 2013 price target of $45. As the underlying social fabric of the Web, Facebook is a unique platform asset with strong network effects, a deep competitive moat, and unparalleled social context. We believe the next phase of the Internet will be driven by data and powered by ubiquitous online access, and Facebook is well positioned here through its large and engaged user base, virtual ownership of the social graph, and unwavering focus on the user experience. Facebook ad platform growing stronger. While Street focus is likely on the shift toward mobile usage, we point out that Facebooks advertising platform is also in the midst of an important transitionads are becoming more social, they are more prevalent in the News Feed, and the Facebook Ad Exchange should increase advertiser demand and inventory yield. Early feedback on Sponsored Stories is positive. Based on our checks we are increasingly bullish on Sponsored Stories in the News Feed on both desktop and mobile. Early data suggests click-through rates and eCPMs for both are several times those of Facebooks traditional desktop ads. Mobile monetization may be better than people expect. Facebook likely will continue to roll out mobile ads in a measured manner going forward, but we believe Sponsored Stories in the mobile News Feed have been turned on more in just the past few weeks and initial results appear positive. Our analysis suggests mobile could become a $300M-$500M quarterly revenue opportunity for Facebook in the next 2-4 quarters as higher pricing and visit frequency offset fewer overall impressions. We expect growth to trough in 2Q and reaccelerate in 2H12 and into 2013. We project 2Q12 revenue of $1.1B (+24% Y/Y) and EBITDA of $587M (+6%, 53.1% margin), but we expect revenue to reaccelerate and margins to expand modestly Q/Q in the back half driven largely by continued solid user growth and newer ad formats. We project 2012-2015 three-year CAGRs of 33% for revenue and 35% for EBITDA. Overweight rating and $45 PT. Our year-end 2013 price target of $45 is based on an average of two methodologies: 1) 17x 2014E EBITDA of $5.0B which yields $39; and 2) our DCF analysis utilizing a 3% terminal growth rate and an 11% WACC which yields $51.
Overweight
FB, FB US Price: $33.10 Price Target: $45.00
Internet Doug Anmuth

AC
(1-212) 622-6571 douglas.anmuth@jpmorgan.com
Kaizad Gotla, CFA

(1-212) 622-6436 kaizad.gotla@jpmorgan.com
Bo Nam
(1-212) 622-5032 bo.nam@jpmorgan.com
Shelby Taffer
(212) 622-6518 shelby.x.taffer@jpmorgan.com J.P. Morgan Securities LLC
Price Performance
45 40 $ 35 30 25
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
FB share price ($) S&P500 (rebased)
Abs Rel
YTD -13.0% -16.8%
1m 6.6% 5.9%
3m -13.0% -7.5%
12m -13.0% -16.0%
Facebook Inc. (FB;FB US) FYE Dec EPS Reported ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY Bloomberg EPS FY ($)
2011A 0.10 0.12 0.12 0.16 0.51 -
2012E 0.12A 0.11 0.12 0.14 0.50 0.52
2013E 0.14 0.15 0.16 0.20 0.66 0.66
2014E 0.92 0.87
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
33.10 26 Jun 12 45.00 - 25.52 86,821.30 Dec 2,623 45.00 31 Dec 13
See page 58 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com
Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com
North America Equity Research 27 June 2012
Table of Contents
Investment Thesis ....................................................................3 Risks to Rating and Price Target ............................................4 Company Description ..............................................................5 Key Questions ..........................................................................6
Can Advertising Monetization Increase Meaningfully? ............................................6 How Is Mobile Impacting FB Users and Revenue? ................................................12 How Much Ad Revenue Could Mobile Generate?..................................................14 Can Facebook Deliver Meaningful ROI for Advertisers? .......................................16 Can Payments Evolve Beyond Gaming? ................................................................18 Will Facebook Get Into Search? ............................................................................20 Will Facebook Build an Ad Network? ...................................................................22
Social Infrastructure Creates Options ..................................23 Large Global Market Opportunity..........................................27

Global User Growth ..............................................................................................27 Advertising Market ...............................................................................................28 Payments ..............................................................................................................30
Culture and Management.......................................................31 Key Facebook Products and Features .................................32

Key User Products ................................................................................................33 Key Advertiser Products........................................................................................33 Key Developer Products........................................................................................35
Current Business....................................................................37
User Growth and Engagement ...............................................................................37 Advertising ...........................................................................................................37 Payments ..............................................................................................................41
Financial Outlook ...................................................................43

Early Lock-Up Expirations Could Create Volatility in the Near Term ....................46
Valuation .................................................................................47 Financial Models.....................................................................50
Investment Thesis
Facebook (FB)
Overweight
Facebook is the premier social layer of the Internet We believe Facebooks virtual ownership of the social graph puts the company in a unique position to influence the way people interact, communicate, and live their lives. Facebooks mission is to make the world more open and connected, and we believe the company achieves this goal through its massive base of more than 900M users, its innovative products and tools, and substantial network effects. Facebook brings people closer together and can add a social layer to nearly everything people do, both online and offline. We believe Facebooks virtual ownership of the social graph, strong competitive moat, and unwavering focus on the user experience position the company to significantly improve monetization over time and to become an enduring, blue-chip company built for the long term. Massive reach and engagement drive network effects Facebooks strong reach and engagement drive powerful network effects which we believe will make it incredibly difficult for direct social competitors to gain any meaningful share. With more than 900M monthly active users (MAUs), Facebook reaches ~13% of the worlds population and nearly 40% of global Internet users and we still expect 35%+ user growth this year in Asia and Rest of World (ROW). In terms of engagement, 526M daily active users (DAUs) or nearly 60% of users visit Facebook any given day. And Facebook users account for one of every seven minutes spent online, or 14% of total Internet time. Monthly mobile users total 488M, or 54% of Facebooks overall user base, and despite the associated nearterm revenue headwinds, we believe ubiquity of devices and increased engagement through mobile will be strong positives for the company over the long term. Targeting abilities provide significant value to advertisers, and still early Beyond Facebooks broad reach and scale highlighted above, the companys mapping of the social graph yields valuable information for brands and advertisers that is highly differentiated and difficult to replicate. Facebooks visibility into user likes and preferences, social connections, and a variety of other social signals and data creates a degree of targeting that is unique both online and offline. Facebook ads are generally targeted, but they are not yet highly social, and marketers are still in the early stages of understanding and implementing successful campaigns. We believe Facebooks ad platform is just beginning to shift toward more social ads with higher-quality formats, and it will become increasingly valuable to advertisers. Strong financial profile with growth expected to accelerate in 2H12 and 2013 Over the next few years we expect Facebook to post 30%+ revenue growth and midto high-50s (%) EBITDA margins. We estimate 2012 revenue growth will decelerate to 30% and EBITDA margins will compress ~740 bps Y/Y to 54.5%, largely due to the shift toward mobile usage and heavy product and advertising investments. However, we are confident that new ad formats will drive greater monetization and lead to accelerating revenue growth and sequential margin improvement in 2H12 and into 2013. Given high margins and projected capex leverage going forward, we also expect Facebook to be a strong generator of free cash flow.
New ad products change the complexion of Facebook advertising We believe Facebooks advertising platform is in the midst of an important transition as formats shift to having greater social context and ads are increasingly placed in the News Feed. Facebook ads have generally been targeted based on a variety of demographic and user preferences data, and Sponsored Stories on the right-hand side of the page have been available since January 2011. But we believe only a minority of ad impressions currently have social context, despite data that suggests ads with social context have 50% better ad recall. Based on our checks with agencies and advertisers we are increasingly bullish on Sponsored Stories both on the desktop and mobile, and we are confident they can deliver meaningfully higher CTRs (click-through rates) and yield higher eCPMs (effective cost per thousand impressions). We are also optimistic on Facebooks new RTB ad exchange which will: 1) enable third parties to re-target users on Facebook, thereby incorporating purchase intent data; and 2) create greater demand and higher inventory yield through a larger base of advertisers. Mobile monetization may be better than people realize The shift toward mobile is widely viewed as a negative for Facebook given limited screen real estate and the lack of mobile ad products. Facebook will also likely continue to roll out mobile ads in a measured manner so as not to compromise the user experience. However, we believe Sponsored Stories within the mobile News Feed have become much more prevalent over just the last few weeks and the initial results appear positive. Early data suggests mobile Sponsored Stories have CTRs and eCPMs that are several times those of traditional Facebook desktop ads. Our analysis suggests mobile could become a $300M-$500M quarterly revenue opportunity for Facebook in the next 2-4 quarters as higher pricing and visit frequency offset a lower overall number of impressions. Location-based advertising could also soon be another high value driver of mobile monetization.
Risks to Rating and Price Target

Facebooks user-first mentality could create short-term risk, volatility We believe Facebooks loyal user base is its most valuable asset and the company intends to remain focused on the user experience above all else. This approach should increase the value of Facebook over time, but also has the potential to result in greater risk and volatility on a short-term basis. Shift in mobile usage well ahead of mobile monetization efforts The rapid shift of Facebook usage toward mobile has created a significant monetization headwind over the last few quarters. This is likely to continue near term as Facebook is in the very early stages of rolling out mobile ads. The mobile display ad market also remains smalla $1B market in the U.S. this year according to IDCand marketers are still figuring out how to run effective mobile campaigns. Mobiles smaller screen real estate and format limitations suggest that desktop ads cannot simply be ported over to mobilemobile requires a different approach.
Advertiser ROI on Facebook may remain difficult to measure Facebook targets the demand generation segment of the purchase funnel and is therefore going after branded advertising spending. However, marketers may still be utilizing Facebook from a direct response approach (demand fulfillment) and they are likely still determining the best way to utilize the Facebook platform across owned, paid, and earned media. GMs recent comments about Facebook highlight this challenge, and we believe GM is not alone. Our industry discussions suggest strong interest in advertising on Facebook, but ad formats and measurement need to improve and Facebook needs to further educate the ad industry. Privacy, security, and regulation As noted above, we believe Facebooks user base is its most valuable asset. Anything that could compromise that user base from a privacy or security perspective represents a significant risk to Facebook. To some degree all Internet companies have similar risks, but trust is an even more integral piece of the Facebook platform given the depth of user-profile data, social connections, and social signals. In November 2011, Facebook reached a 20-year settlement agreement with the FTC on the practices and treatment of user data and privacy settings, including an independent privacy audit every two years. We also believe Facebook needs to further educate users about privacy settings and make them easier to change. Dual-class share structure and Mark Zuckerberg control Facebook has a dual-class share structureClass A shares have one vote each while Class B shares have 10 votes each. Owners of Class B shares hold ~96% of the voting power post IPO, including Mark Zuckerberg with ~57%. Concentrated voting power is likely to make the company more nimble in a dynamic Internet landscape, but it also leaves institutional shareholders with little say in how the company is run. Lock-up expirations are both early and staggered, bringing considerable supply As highlighted in Figure 41 of this report, Facebooks lock-up expirations run from three months to one year post IPO, with the largest expiration coming at six months. Facebook also plans to sell ~$4B worth of existing stock into the market roughly six months after the IPO (November 2012) to pay a large tax bill related to RSU vesting. Facebook sold ~16% of the company into the public market through the IPO, but increased supply over the next year could lead to greater volatility in the share price.
Company Description
Founded in 2004 and based in Menlo Park, California, Facebook is the largest online global social network and enables its 900M-plus users to connect with friends, family, brands, public figures, and organizations. Users and businesses can share information and photos, form interest groups, and express their lives and identities in many ways. Facebook is a free service for its users, supported by revenues from advertising and payments. Advertisers can engage Facebooks user base through highly targeted ads and the ability to add social context from user profiles and interactions. Developers can also leverage Facebooks platform through APIs (application programming interfaces) to personalize and engage in social interactions for new products and partnerships with other businesses.
Key Questions
Can Advertising Monetization Increase Meaningfully?
One of the primary controversies surrounding Facebook is whether the company can meaningfully increase advertising monetization. While we expect Facebooks worldwide user growth to remain solid in the coming yearsdespite currently having over 900M users or 40% of the global online populationwe think an increasing proportion of Facebooks future growth is likely to come from improved monetization or ad revenue per user. We believe user growth and revenue growth are converging in 2012, but we expect ad revenue to reaccelerate in the back half of this year and into 2013, again driving a greater gap between these measures. We model Facebooks ad revenue based on: 1) the number of impressions; and 2) pricing on an eCPM basis. Based on the still-early stage of Facebook advertising and near-term macro pressures in Europe we do not model any pricing improvement in 2012. However, going forward we anticipate pricing increases to become a larger relative driver of ad revenue growth. We believe Facebook can significantly improve advertising monetization as evidenced by the reacceleration we model in 2H12 and into 2013, and the relatively stable ~30% ad revenue growth we anticipate over the next few years. Key ad monetization drivers include: 1) transition of the ad platform toward more social ads and higher-quality formats, especially on the desktop; 2) mobile monetization which is just beginning; 3) continued education of marketers; 4) development of better ROI tools; 5) Facebooks RTB ad exchange; and 6) location-based advertising. Social advertising in very early stages. We think social marketing remains in its early stages and there has yet to be the breadth and depth of advertisers required to drive deeper monetization of Facebooks usersthat is part of the opportunity going forward. And even though ads are usually targeted, we believe there are major opportunities to add greater social context to ads, particularly as ads with social context have 50% better ad recall than ads without it according to a Facebook study. Potential for Facebook to grow revenue per user. In order to better gauge Facebooks potential revenue opportunity, we compared Facebooks revenue per user to those of a range of other large online advertising and social networking companies. As shown below in Figure 1, Facebooks worldwide revenue per user trails those of large U.S. web companies including Google and Yahoo!. Facebooks revenue per user was roughly 32% below Yahoo!s last year, but we expect this gap to shrink over time as Facebook improves its advertiser depth and targeting/ measurement capabilities.
Figure 1: Facebook Revenue per User Compared to Other Internet Companies

$30.0 $28.26
Revenue / User 2011
$20.0
$10.0
$8.63
$7.49
$6.44
$5.11
$4.47
$3.91 $0.92
$0.0 GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren

Source: Company data and J.P. Morgan estimates. Note: Worldwide data.
We model revenue per user to grow from $5.11 in 2011 to $6.27 by 2014, rebounding to double-digit growth after a flattish 2012. We would not expect Facebook to reach Googles $28/user anytime soon given that search typically targets users close to the bottom of the purchase funnel and advertisers are willing to pay a premium for ads that directly lead to a near-term purchase. We believe it also remains easier to calculate ROI metrics for search compared to social. We also note that Facebooks revenue per user trails those of other web companies in spite of having higher engagement or time spent per user. As shown in Figure 2 below, Facebook accounted for nearly 14% of online time spent in the U.S. in 2011more than any other sitethough it accounted for just 5% of U.S. online advertising spend. We expect near-term share gains to continue at the expense of portals such as Yahoo!, AOL, and MSN as dollars follow engagement. But we expect Google to continue to take disproportionate share as advertisers are extremely familiar with the measurability and ROI of search.
Figure 2: Facebooks Share of U.S. Online Advertising Significantly Lags its Share of Usage
U.S. Data for 2011
45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
42.5%
14.4% 5.0% Facebook
10.2%
9.0% 10.4% 3.1%
6.3%
Google % Share of time spent
Yahoo! % Ad Share
AOL
Source: Company data, IAB, comScore, and J.P. Morgan estimates. Google U.S. share includes O&O and Network revenue.
Significant monetization potential across geographies. Figure 3 below also highlights the significant monetization gap that exists across Facebooks reported geographies. As early as social advertising is in the U.S., it is at an even earlier stage in international markets. We believe Facebook is generally showing fewer impressions in these markets and CPMs are significantly lower. For example, we project Facebook will have an average eCPM of $0.36 in the U.S and Canada in 2012, but average pricing of only $0.17 in Europe, $0.16 in Asia, and $0.10 in Rest of World. Overall, on an eCPM basis Facebook inventory is currently priced like low-end remnant online inventory, and is therefore well below guaranteed online inventory and virtually all offline media. We believe pricing across all geographies can increase over time as Facebooks ad platform transitions to more social ads and higher-quality formats.
Figure 3: Facebook Revenue/User by Geography
2010A 2011A Revenue per MAU (ARPU) Summary US & Canada $8.62 $11.50 Europe $3.85 $5.61 Asia $1.49 $2.08 Rest of World $0.27 $1.56 Total $4.08 $5.11 Y/Y Growth US & Canada Europe Asia Rest of World Total
2012E $11.86 $5.68 $2.57 $1.88 $5.05
2013E $13.04 $6.61 $2.93 $2.45 $5.55
2014E $14.29 $8.08 $3.42 $3.19 $6.27
32%
33% 46% 40% 468% 25%
3% 1% 24% 21% -1%
10% 16% 14% 30% 10%
10% 22% 17% 30% 13%
Source: Company reports and J.P. Morgan estimates.
Measurement of ROI underdeveloped. According to a 2011 Social Marketing Survey, only 13% of marketers said they are very effective at measuring results of their social media campaigns. We think this data point suggests the early and experimental nature of Facebook advertising for many advertisers and believe the company needs to continue to roll out new ad formats and metrics to help advertisers and agencies substantiate the efficacy of Facebook ads. We think Facebook is positioned to become a leading brand awareness or demand generation vehicle for advertisers, though our checks suggest that many advertisers on the platform continue to use Facebook mostly as a direct response toolan approach through which Facebook likely underperforms other ad formats such as search. As a result, we think traditional ROI measurement techniques likely need to be adjusted to include the impact on Fans and Friends of Fans to account for the full viral nature of Facebooks ad formats and audience.
Figure 4: Effectiveness at Measuring Social Media Campaigns According to U.S. B2C and B2B Marketers
% of Total
Very Not at all effective , effective, 13% 12%
Not very effective , 28%
Somewhat effective, 47%
Source: Chief Marketer, 2011 Social Marketing Survey.
Three near-term monetization drivers. We model an acceleration in revenue growth in 2H12 and into 2013 as we are positive on monetization improvements driven by: 1) greater inclusion of Sponsored Stories in the Desktop News Feed; 2) Sponsored Stories on Mobile; and 3) the Facebook Ad Exchange. Sponsored Stories in Desktop News Feed. Facebook launched its sponsored stories ad format on the desktop in January 2011, though these ads were originally relegated to the right rail of a Facebook page. The Sponsored Stories ad format allows marketers to amplify the distribution of stories or posts that users have already shared. For example, when a user on Facebook likes Starbucks, Starbucks can then use Sponsored Stories to highlight that to a users friends. Sponsored Stories can be created around a number of actions including Likes, RSVPs, check-ins, app usage, and others. In January 2012, Facebook began including Sponsored Stories in a users News Feed on the desktop. We think the inclusion of Sponsored Stories in the News Feed makes the ads much more prominent to the user and should increase their effectiveness. Therefore, we believe advertisers should be willing to pay a premium for this exposure. According to a recent study of 17 clients by TBG Digitala company that places ads through Facebooks ads API Facebooks Desktop Sponsored Stories in the News Feed have a 6x higher click-through rate than overall desktop ads (News Feed + Sidebar), as shown in Figure 5. In addition, eCPMs on desktop News Feed ads at $3.72 are much higher than those of overall desktop (News Feed + Sidebar) ads at $0.74. We note that Sponsored Stories in the desktop News Feed are almost entirely incremental given that these ads have only been recently rolled out by Facebook in a meaningful way.
Figure 5: Facebook Sponsored Story Ad Performance

1.200% 1.000% 0.800% 0.600% 0.400% 0.200% 0.000% 0.083% $0.74 Desktop (News Feed + Sidebar) Desktop News Feed
eCPM CTR
1.140% 0.588% $9.86 $3.72 Mobile News Feed
$12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00
Source: TBG Digital and TechCrunch.
Sponsored Stories on Mobile. As we highlighted earlier, users have been adopting Facebook on mobile at a rapid rate, and even if it has created incremental usage, it has been a net negative to revenue given the lack of monetization on mobile devices. In addition, the lack of screen real estate leaves potentially fewer opportunities to place ads in a mobile Facebook users session or visit. Facebook officially began rolling out Sponsored Stories in the Mobile News Feed in March 2012, but our checks with both advertisers and users suggest frequency has increased more materially over just the last few weeks. The challenges of monetizing mobile are well known in terms of lack of screen real estate and perhaps shorter engagement sessions. But we believe Sponsored Stories on Mobile will benefit from being directly in a users News Feed, without any of the other potential visual distractions that may exist on the desktop. According to the TBG Digital study mentioned above, Sponsored Stories in the Mobile News Feed click-through rates and eCPMs are both 13x higher than those of overall desktop ads on Facebook and about 2x as high as those of desktop News Feed Sponsored Stories.
Figure 6: Facebook Sponsored Story Ads in Mobile (Left) and Desktop (Right)
Source: Facebook iPhone App and Company website. Note: Used with permission.
10
According to comScore, the News Feed/Homepage accounts for ~40% of Facebook user activity in terms of time spent, making it the largest driver of monetization on both desktop and mobile as it is the primary area where brands can communicate with their Fans and Friends of Fans. However, despite the high usage of News Feed, a minority of Fans see content from a brand in a given week. According to Facebook, only 16% of Fans are reached by branded content from a brand that posts content five out of seven days on its Facebook page, as some fans may miss content based on their usage patterns and the volume of content flowing through the News Feed. In addition, Facebooks algorithm ranks content or stories based on relevance so only a fraction of content/stories are delivered to a user at a specific time. We believe Sponsored Stories can become an extremely effective ad format over time as they blend in with the rest of a users stories and the user likely perceives them with similar importance to unpaid stories.
Figure 7: Share of Time Spent on Facebook.com by Activity (%)
Other, 16%
Profile Pages, 12%
Homepage/ Newsfeed, 40%
Apps/Tools, 14% Photos, 18%

Source: comScore Mediabuilder, U.S., March 2012.
Facebook Exchange should improve targeting. Facebook recently announced it would allow advertisers to bid on specific impressions in real time through its Facebook Exchange. Real-time bidding allows advertisers to bid on specific impressions or users rather than inferring user intention through broad demographics (age, gender, etc.) or interests. One of the keys to the Facebook Exchange is the ability for advertisers to use third-party data to target ads on Facebook. For example, if a user visits an online travel agent but leaves before the check-out process, the online travel agent can re-targetsite targeting in this casethat user on Facebook with additional messages or offers. Facebook will allow real-time bidding for ads on the right-hand side of a page and therefore the users News Feed will not currently include re-targeted ads. In addition, pricing will be based on a CPM basis and initial technology partners will include TellApart Inc., Turn Inc., Triggit, DataXu Inc., MediaMath Inc., AppNexus Inc., The Trade Desk Inc., and AdRoll.com. Exchange partners will now have access to a new, large pool of inventory through Facebook, which should help increase advertiser demand and yield on the Facebook platform. We believe site re-targeting could significantly improve ad pricing on Facebook. According to AdRoll.comone of the technology partners mentioned above CPMs for site targeting can range from $1.00 to $2.50, well above Facebooks current CPM of ~$0.30 in the U.S. According to DataXu, pricing for re-targeting campaigns is 3x higher (see Figure 8) than a run of exchange (broad buy across an exchanges inventory) as multiple DSPs (demand-side platforms) and ad
11
networks bid on a limited number of high-value impressions. We think Facebooks ~70% reach in the U.S. and high engagement14% of all minutes onlinemake it well suited for advertisers to re-target users on Facebook. In addition to the expected pricing benefits from the Facebook Exchange, we think more relevant ads should also improve the user experience.
Figure 8: Prices for Re-Targeted Ads on Ad Exchanges Up to 3x Those of Non-Targeted Ads
%
400% 300% 200% 100% 0% Run of Exchange (ROE) Optimized ROE Audience Targeting Retargeting Campaign Types
Source: DataXu, MarketPulse, September 2010.
3x
How Is Mobile Impacting FB Users and Revenue?

Facebook has witnessed significant growth in mobile usage as a result of rapid smartphone and tablet adoption. We think mobile is driving higher usage of Facebook overall as DAUs as a percentage of MAUsa measurement of overall engagementhas increased to 58.4% in 1Q12 from 54.7% a year ago. Mobile transition has been a net negative to Facebooks revenue over the last few quarters and Facebook will likely continue to take a very reserved approach to displaying ads in Mobile to test the impact to the user experience. As Mobile will likely have fewer ads per session than desktop, even though Mobile is driving incremental usage of Facebook overall, it may be cannibalistic to revenue in the near term depending on how quickly mobile usage replaces desktop usage on Facebook. However, as noted above, we think Mobile adsspecifically Sponsored Stories in the Mobile News Feedcan have significantly higher click-through rates and eCPMs, which should help offset the smaller number of overall ad impressions. Furthermore, we think Facebook has begun rolling out Mobile Sponsored Stories more in June and we forecast an inflection in Mobile and overall revenue in 2H12. As shown in Figure 9 below, Facebooks overall audience increased by 56M monthly users in 1Q12 (+7% Q/Q), though web-only users were flat Q/Q. Mobile-only users increased 25M and Web and Mobile users increased 31M.
12
Figure 9: Facebook Users by Medium

Users in millions
1000 800 600 400 200 0
845
413
901
413
374 58 4Q11A Mobile Only Web and Mobile Web Only
405 83 1Q12
Source: Company reports.
While Facebooks 83M mobile-only users generated close to no revenue in 1Q12, its unclear how usage of Web and Mobile (405M) users is split between the two platforms. According to comScore, mobile users on average spend 441 minutes/user/ month on Facebooks mobile apps/mobile site compared to 391 minutes/user/month on the PC. This suggests mobile could account for ~30-40% of all time spent on Facebookactivity thats almost completely unmonetized today, but increasingly will be going forward.
Figure 10: Facebooks Mobile Users Are More Engaged Than its Web Users
Minutes per User
500 450 400 350 300 250 200 150 100 50 0 391.1
441.3
18.8 Facebook Web Mobile
12.9
Linkedin
Source: comScore, US data.
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We think evidence suggests that mobile is slowing web usage growth and perhaps even cannibalizing web usage or engagement. As we mentioned earlier, increasing DAUs as a percentage of MAUs suggests overall engagement on Facebook (Web and Mobile) is increasing. However, as Figure 11 below suggests, growth in web/PC engagementmeasured in visits per unique visitorhas slowed significantly in the last 2-3 quarters. We think mobile is the primary driver of this shift in user behavior. We believe mobile is likely to remain a net negative in the very near term as users migrate from desktop to mobile faster than ads materialize, but mobile monetization will begin to kick in over the next few quarters and mobile creates a compelling long-term opportunity for Facebook.
Figure 11: Facebooks Web Activity Growth Across Unique Visitors and Average Visits per Visitor
Y/Y Growth
40% 35% 30% 25% 20% 15% 10% 5% 0% -5%
Unique Visitor Growth

Source: comScore, US data. Web/PC use only.
Average Visits per Visitor Growth
How Much Ad Revenue Could Mobile Generate?

Estimating Facebooks mobile ad revenue potential is difficult, but it is also a critical question for many investors. As noted above, despite the potential negative revenue impact of Facebooks usage shift toward mobile, we are optimistic about Facebooks ability to monetize its mobile platform based on strong engagement, a captive audience focused on the News Feed, and mobile ads that may potentially have higher click-through rates and eCPMs than desktop ads. As shown in Figure 12 below, we model several scenarios for Facebooks mobile monetization as the company slowly rolls out Sponsored Stories in the Mobile News Feed and experiments with additional mobile ad formats. The range of potential mobile revenue outcomes is wide based on estimates for impressions per mobile visit, visits per user, and pricing. Based on our analysis, we believe mobile could become a $300M-$500M quarterly revenue opportunity for Facebook within the next 2-4 quarters.
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Figure 12: Facebook Quarterly Mobile Ad Revenue Potential Based on 1Q12 User Metrics Web Mobile in millions Scenario 1 Scenario 2 Scenario 3 Users 488 488 488 818 Qtrly Ad Impressions (in billions) 4,600 32.9 - 76.9 65.9 - 153.7 98.8 - 230.6 Visits/User/Month 32.1 45 - 105 45 - 105 45 - 105 Impressions/Visit 58 0.5 1.0 1.5 eCPM $0.19 $3 - $7 $3 - $7 $3 - $7 Qtrly Ad Revenue $872 $99 - $538 $198 - $1,076 $296 - $1,614 Revenue/User/Month $0.36 $0.07 - $0.37 $0.14 - $0.74 $0.20 - $1.10
Scenario 4 488 131.8 - 307.4 45 - 105 2.0 $3 - $7 $395 - $2,152 $0.27 - $1.47
For our analysis, we looked at web monetization and found that Facebooks 818M web users in 1Q12 generated $872M in ad revenue$0.36 per user per month. Our estimates suggest web users were exposed to 58 impressions per visit at an eCPM of $0.19. By contrast, Facebook has 488M (and growing) mobile users and we think mobile users are likely to use or visit Facebooks mobile apps more frequently. We estimate a range of 0.5-4.5 times per day, or 15-135 visits per month. We think the number of ad impressions that can be delivered in a mobile visit (0.5-2) is a fraction of web impressions per visit (58). However, we think mobile eCPMs are likely to be significantly higher as mobile Sponsored Stories have social context, are only in the News Feed, and face less competition from other Facebook content on the screen. Our analysis uses a mobile eCPM range of $1-$9. Pricing is critical, but impressions per visit and visits per user are the other key variables. Based on Facebooks focus on the user experience, we would not expect ad impressions per mobile visit to go above 2, and that is likely high early on. In Figure 13 below we look at several scenarios to determine whether a mobile user could generate more ad revenue per user than a web user. Our breakeven point for web revenue per user is $0.36/user/month based on 32 visits/month, 58 impressions/visit, and an eCPM of $0.19. Hence, the shaded segments in the left-hand tables indicate the scenarios under which Facebook can be revenue neutral on a per-user basis assuming all of their activity shifted to mobile. Our views on mobile pricing and frequency of visits give us confidence in Facebooks ability to reaccelerate advertising growth. Facebooks desktop ads should also see improving monetization through Sponsored Stories in the News Feed and Reach Generator.
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Figure 13: Facebooks Web to Mobile User Migration Revenue Breakeven Scenarios
$s
Mobile Revenue/User/Month
Impressions Per Mobile Visit --> eCPM $1.00 $3.00 $5.00 $7.00 $9.00 15
(0.5/day)
Quarterly Mobile Ad Revenue (in $Ms)

Impressions Per Mobile Visit --> 0.5 Visits/User/Month 15 45 75 105 eCPM
(0.5/day) (1.5/day) (2.5/day)
45 $0.02 $0.07 $0.11 $0.16 $0.20
0.5 Visits/User/Month 75 105

(2.5/day) (3.5/day)
135
(4.5/day)
135
(4.5/day)
(1.5/day)
(3.5/day)
$0.01 $0.02 $0.04 $0.05 $0.07
$0.04 $0.11 $0.19 $0.26 $0.34
$0.05 $0.16 $0.26 $0.37 $0.47
$0.07 $0.20 $0.34 $0.47 $0.61
$1.00 $3.00 $5.00 $7.00 $9.00
$11 $33 $55 $77 $99
$33 $99 $165 $231 $296
$55 $165 $275 $384 $494
$77 $231 $384 $538 $692
$99 $296 $494 $692 $889
(0.5/day)
45 $0.05 $0.14 $0.23 $0.32 $0.41
1 Visits/User/Month 75 105
(2.5/day) (3.5/day)
135
(4.5/day)
(1.5/day)
Impressions Per Mobile Visit --> 1 Visits/User/Month 15 45 75 105 eCPM

(0.5/day) (1.5/day) (2.5/day)
135
(4.5/day)
(3.5/day)
$0.02 $0.05 $0.08 $0.11 $0.14
$0.08 $0.23 $0.38 $0.53 $0.68
$0.11 $0.32 $0.53 $0.74 $0.95
$0.14 $0.41 $0.68 $0.95 $1.22
$1.00 $3.00 $5.00 $7.00 $9.00
$22 $66 $110 $154 $198
$66 $198 $329 $461 $593
$110 $329 $549 $769 $988
$154 $461 $769 $1,076 $1,383
$198 $593 $988 $1,383 $1,779
(0.5/day)
45 $0.07 $0.20 $0.34 $0.47 $0.61
1.5 Visits/User/Month 75 105

(2.5/day) (3.5/day)
135
(4.5/day)
(1.5/day)
Impressions Per Mobile Visit --> 1.5 Visits/User/Month 15 45 75 105 eCPM

(0.5/day) (1.5/day) (2.5/day)
135
(4.5/day)
(3.5/day)
$0.02 $0.07 $0.11 $0.16 $0.20
$0.11 $0.34 $0.56 $0.79 $1.01
$0.16 $0.47 $0.79 $1.10 $1.42
$0.20 $0.61 $1.01 $1.42 $1.82
$1.00 $3.00 $5.00 $7.00 $9.00
$33 $99 $165 $231 $296
$99 $296 $494 $692 $889
$165 $494 $824 $1,153 $1,482
$231 $692 $1,153 $1,614 $2,075
$296 $889 $1,482 $2,075 $2,668
(0.5/day)
45 $0.09 $0.27 $0.45 $0.63 $0.81
2 Visits/User/Month 75 105
(2.5/day) (3.5/day)
135
(4.5/day)
(1.5/day)
Impressions Per Mobile Visit --> 2 Visits/User/Month 15 45 75 105 eCPM

(0.5/day) (1.5/day) (2.5/day)
135
(4.5/day)
(3.5/day)
$0.03 $0.09 $0.15 $0.21 $0.27
$0.15 $0.45 $0.75 $1.05 $1.35
$0.21 $0.63 $1.05 $1.47 $1.89
$0.27 $0.81 $1.35 $1.89 $2.43
$1.00 $3.00 $5.00 $7.00 $9.00
$44 $132 $220 $307 $395
$132 $395 $659 $922 $1,186
$220 $659 $1,098 $1,537 $1,976
$307 $922 $1,537 $2,152 $2,767
$395 $1,186 $1,976 $2,767 $3,558
Source: J.P. Morgan estimates.
Can Facebook Deliver Meaningful ROI for Advertisers?

We think there has been some degree of controversy around the efficacy of advertising on Facebook, particularly since General Motors announced last month that it would no longer spend on paid ads on Facebookpreferring to invest in unpaid content on GMs Facebook page. With Facebook users totaling over 900M, we think its difficult for an advertiser to ignore Facebook and we note that all of the Ad Age 100 advertisers spend on Facebook advertising. Our discussions with advertisers suggest strong interest in advertising on Facebook, though ad formats and measurement still likely need to evolve for advertisers to spend on Facebook in a meaningful way. According to a recent study by Ipsos, 20% of Facebook users purchased products because of ads or comments they saw on Facebook (Figure 14), suggesting significant potential for advertisers to implement effective marketing strategies. We think the onus remains on Facebook to continue to create new methods for advertisers to measure ROI in order to meaningfully increase advertising on the site.
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Figure 14: Facebook Drives a Significant Amount of Purchasing Decisions

U.S. Facebook Users Who Have Bought Products Because of Ads or Comments They Saw on Facebook, by Age, June 2012
18-34 35-54 55+ Total 0% 17% 12%
28% 83% 88%
72%
20% 10% 20% 30% 40% 50% Yes No
80% 60% 70% 80% 90% 100%
Source: Reuters survey conducted by Ipsos, June 2012.
Many brands use Facebook paid ads to drive Likes to the brands Facebook page and these campaigns are often measured on a cost-per-like basis. Once a Facebook user likes a brand (i.e., becomes a Fan), the brand creates a direct line of communication with the useralmost akin to an email marketing list. However, we think the marketing value of these Fans to a brand goes well beyond direct Fans to Friends of Fans as well, since each Fan (of a top 100 brand) has nearly 34 friends (per comScore) to which he/she can advocate the brand. As shown in Figure 15, Kenshoo Social reported that over 77% of people clicking on Sponsored Story ads promoting brand page Likes convert to fans, exhibiting the value of social context in ads.
Figure 15: Conversion Rates for Clicks in Sponsored Stories
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 0.2% App Share App Used Conversion Rates
Source: Kenshoo Social and J.P. Morgan estimates.
77.3% 60.4%
15.7%
Like
Post Like
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A recent study by comScore commissioned by Facebook sheds some light on the effectiveness of Facebooks paid ads. The study analyzed the lift to online and instore purchasing behavior for users exposed to Facebook ads of a major retailer. The results showed a 16% lift in in-store purchases (1.47% of users exposed to Facebook ads, up from 1.27%) for users exposed to Facebook ads. In addition, Facebook ads yielded a 56% increase in online purchases for the retailer from exposed customers vs. customers that had not been exposed to Facebook ads.
Figure 16: Facebook Ads Drove a Significant Lift in Purchases for a Major Multichannel Retailer
% of Exposed Group Purchasing Online and In-Store in the Weeks Following Facebook Ad Exposure
1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 0.46% 0.37% 0.19% 0.11% Week 1 Online-Test
Source: comScore and Facebook.
1.47% 1.18% 1.27% 0.84% 1.00% 0.69% 0.38% 0.49% 0.61%
0.20% Week 1-2 Online-Control
0.32% Week 1-3 In-Store-Test
0.39% Week 1-4 In-Store-Control
We also think that Facebook is in the early stages of ad monetization. We believe marketers realize meaningful value in maintaining a brand presence via an unpaid Facebook page. Over time, in our view Facebook could add additional paid tools for brands to improve their Facebook pages or presence which could drive significant monetization improvements. We think Sponsored Storieswhich allows brands to amplify their communications to Facebook Fansis likely the first step in many toward driving higher revenue from Facebook marketers.
Can Payments Evolve Beyond Gaming?

Social gaming represents the largest portion of Facebooks Payments business and we think Zynga still drives the majority of Facebooks Payments revenue64% of Facebook Payments/Fees revenue in 1Q12. While the network and distribution effects of Facebook integration are clear in our view, we think Facebook is taking a cautious approach toward monetization and as a result Payments today are almost exclusively generated through in-app purchases in social games. As it did with games, Facebook in our opinion can continue to leverage network effects to drive in-app purchases in social media discovery beyond the games vertical to music, news, and online video. However, we believe the underlying economics in digital music, online news, and video are not likely to be as rich as those for games, and we see Facebook taking a smaller percentage of these transactions though we think volumes could be significantly higher than those with games.
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Music. We think deep Facebook integration has been instrumental in Spotifys growth from 3M MAUs in September 2011 (pre-integration) to 22M MAUs in June, according to AppData. The Spotify integration allows users to sign into Spotifys service using their Facebook account so that a users Facebook Friends can view and share playlists. News. While Facebook currently features Trending Stories in the News Feed of popular stories read by users, we think there could be a way for Facebook to monetize news for paid online articles or within paid reading apps. Online Video. We think the distribution and marketing effects of this kind of integration are powerful and we see similar opportunities for deep integration with online video services such as Netflix in the intermediate term. We believe there is also potential for Facebook to expand its Payments beyond inapp purchases. Not only is Facebook expanding its own products with the App Center and paid apps, but many partner sites and developers currently leverage the Facebook social graph through Open Graph at no cost. In the intermediate to long term, we think Facebook may be able to monetize such Payment platform products. App Center. We note the companys recent App Center launch which enables social discovery of new apps, some of which may be paid and therefore potentially monetizable for Facebook. Open Graph. We think the volume of traffic that Facebook brings to app developers is significant and we remain positive that the company can find new monetization methods and effectively become the toll-taker of user purchasing activity on Facebook and third-party sites leveraging Facebooks Social Graph. Other, such as Connected TV. We believe there may be other areas in which Facebooks social layer can add value which could be monetized as well. We think one such idea could be the potential for Facebook to be the social layer for Connected TVs so that users can share and recommend TV content directly to their social network without having to use a separate device. Facebook data and targeting capability could also serve as the basis for ad delivery in an IP-enabled ad environment.
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Figure 17: Snapshot of Facebook App Center
Source: Facebook. Note: Used with permission.
Will Facebook Get Into Search?

We believe competition between Google and Facebook is likely to increase over the next several years as each company vies to become both the starting point and primary toll-taker on the web. Google has social products such as Google+, Google +1, and Google Search Plus Your World in order to improve its search tools using social signals. While it is still early, we think Facebook has a significant lead in social through strong user metrics and engagement that do not appear to be decreasing. According to comScore, Facebook generates a large amount of searchesroughly 2B or 1% worldwide sharethough we think the vast majority of these searches are likely to be non-commercial or people searches. As witnessed during the Google/MySpace deal from 2007, monetization of search inventory on social networks is challenging, in our view, and as a result we dont think Facebook is likely to launch its own search engine anytime soon. However, we believe Facebook will increasingly leverage its users social signals (Likes, Shares, etc.) to bolster a competitive search servicemost likely being Microsofts Bing. Just as Google applies its Page Rank algorithm to rank a websites relevance based on the number of other websites linking into it, we think Bing is integrating Facebooks social signals to rank its search results and provide a differentiated search experience.
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Figure 18: Snapshot of Facebook Bing Integration
Source: Bing.com. Note: Used with permission.
In May, Bing announced it began including Likes and recommendations from Facebook friends and strangers into its search results. In addition, Bing also announced the roll-out of a social sidebar which allows Bing search users to solicit help from their Facebook friends while performing a search. For example, a search for hotels in Chicago would feature a users Facebook friends living in Chicago as well as the ability to request help finding a hotel from a users Facebook friends. We do not believe Facebook has closed the door on one day becoming a principal in search. However, we do not view it as a near-term priority and we believe it would have to provide a differentiated experience in a social setting without negatively impacting the user. In the meantime we believe Facebook is rightly focused on user growth and monetization of its core social network. Building a robust search engine would require significant engineering and capex resources that could prove a distraction for management. We also think that Facebook currently offers a discovery mechanism, though it is a push model rather than Googles pull model, in which the user requests or pulls the information of interest. Hence, creating a search service could potentially cannibalize existing usage of Facebook by frequently redirecting users outside the Facebook network. Of course Facebook is already a material driver of traffic for sites all across the Web. We see the relationship with Bing continuing to grow stronger as the two companies face Google as a large competitor. As mentioned previously, we think Facebooks query volume is primarily related to people searches and therefore typically difficult to monetize. We think Facebook is unlikely to implement a similar search integration with Google, and given the differentiation it provides, Microsoft (MSFT, $30.02, rated Neutral by J.P. Morgan Software analyst John DiFucci) may be willing to ultimately compensate Facebook for exclusivity, in our view.
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Will Facebook Build an Ad Network?

As comparisons to Google are common, we think many have concluded that a Facebook ad network is the next logical step in the companys progression, particularly given that Facebook is the social layer underlying many different websites across the web and therefore following the same user from Facebook across other sites could drive greater reach and ad performance. In recent weeks Facebook has seemingly taken two key steps toward the direction of an ad network through the launch of its RTB Ad Exchange and serving ads on Zynga.com. However, we still think a Facebook ad network is unlikely in the near term for a few reasons: Facebook is better served driving O&O sales. As weve frequently discussed in this report, it is early in social advertising. We believe Facebook needs to prove out efficacy and returns more on its core platform before it can more broadly deliver ads on third-party sites. We note that Google was able to quickly deploy its existing search and ad technology to build out a contextual ad network, but we believe Googles text-based ads were perhaps more extensible early on to third-party sites than Facebooks social ads may be. We think Facebook is likely to focus in the near term on improving its O&O (Owned & Operated) ad platform on which it does not share revenue with publisher partners. We believe the recent Facebook Exchange announcement is a significant positive for improving monetization by leveraging third-party data and advertiser demand, but we note that it remains limited to Facebooks O&O inventory. Facebook is still in the process of refining its own ad technology. We think the Facebook ad platform remains nascent and advertisers have yet to fully embrace Facebooks ad formats in a meaningful way, as concerns about measurability and ROI remain. We believe Facebook would be better served getting this right on its own platform before extending it to other sites. Facebook already has significant reach. One of the primary reasons advertisers employ ad networks is to increase their reach by advertising across multiple websites across the web. We think Facebook already offers advertisers significant reach in most geographiesover 70% of U.S. Internet usersand significant engagement offers several opportunities for advertisers to target users exclusively on Facebook.com rather than targeting Facebook users on third-party sites. Privacy issues. We also think Facebook is likely to tread carefully when it comes to targeting its users on third-party websites. The recent RTB/re-targeting announcement enables exchange partners to use third-party site data to target users on Facebook.com, but it does not include ad targeting of Facebook.com users on a third-party website. Ad ROI. We think social ads work well in a social environmentlike Facebook.combut its unclear whether users will find social ads valuable in a third-party setting and it could raise user concerns around privacy.
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Social Infrastructure Creates Options

We believe Facebook has become the underlying social fabric of the Internet and we think this utility gives the company and investors significant option value in terms of launching new businesses in the future. We think the Internet ecosystem is settling around a few select companies that will provide the base or foundation of application development over the next several years. We believe Amazon, Apple, Google, Facebook, and eBay are emerging as primary platforms on top of which large amounts of online/mobile communications, advertising, and commerce are likely to be conducted over the next decade. We use five key attributes to define and evaluate the competitiveness of a platform and we believe Facebook ranks highly in each of these key attributes: Global reach. A platforms underlying technology and network is easily scalable across geographies. Facebook and Google are likely the best examples of this given their strong brands and widespread adoption among users and developers across the world. Large ecosystem. Platforms have strong relationships with developers/partners that build their businesses or applications on top of the underlying platform architecture. Apple (AAPL, $572.03, rated OW by J.P. Morgan IT Hardware analyst Mark Moskowitz) has created a robust applications ecosystem through iOS and its iTunes store, and as a result has become the primary distribution focus for developers. Device agnosticism. Android is probably the best example as it is an open-source operating system that runs on many mobile devicesin sharp contrast to Apples iOS. Facebook is also accessible across most devices and operating systems though the company has deeper integration with Microsoft and Apple, partially due to competition from Google. Network effects. Leading platforms have robust network effects such that each additional user of the platform enhances the value of the platform to existing users. The best example of this in our view is Facebook, though we believe Apples AppStore also has strong network effects. Toll booths. Platforms typically generate revenue from transactions or activity that occurs through applications that reside on them. Examples are Facebook Credits, Google AdWords/AdSense, and the Apple App Store.
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Figure 19: Large Web Platforms and Their Ecosystems

Amazon
Third Party Marketplace Amazon Web Services Fulfillment by Amazon Kindle
Apple
iTunes
Apple App Store
iOS Operating System
Google
eCommerce sites Content sites such as NY Times
Android AdWords/AdSense
Facebook
Social Games Utility apps such as Birthday Cards & Horoscopes eCommerce Marketplace Paypal Consumers/ Merchants
Business/Nonprofit apps such as Causes Communication tools such as Windows Live Messenger Channel Advisor, Mercent Third party Paypal apps
eBay
Source: J.P. Morgan.
While we expect advertising to remain the primary driver of Facebooks revenue for the next several years, we think Facebooks strong social platform lends itself to many future monetization opportunities: New ad formats. Weve talked about how Facebook ads are in transition toward becoming more social in context and higher quality. Accordingly, we think formats will continue to evolve across the desktop right rail, the desktop News Feed, and mobile. We believe location-based targeting is likely in the near term, especially on mobile devices. We believe this could be a significant opportunity to drive Facebook advertising among local merchants. Over 4M small businesses now have a Facebook page. Adding premium tools to brand pages. We think many brands are increasingly relying on their Facebook Fan or brand pages to communicate with users and drive word-of-mouth marketing. We think this is apparent in the fact that in TV ads many large CPG brands now direct consumers to visit their Facebook page rather than their own website. Facebook is well positioned to monetize this trend, in our view, by offering brands premium tools to manage and distribute content from their Fan pages, and we think the recent roll-out of Sponsored Stories in the News Feed is an example of brands paying Facebook to amplify their stories. Monetizing the social graph. We think several companies including Spotify, TripAdvisor, and Zynga have witnessed sizable user growth through deep Facebook integrations and in our opinion Facebook may increasingly monetize its social utility by requiring companies with deep Facebook integrations to pay a fixed licensing or per-user/subscriber fee. As detailed later in this report, we think digital music, online video, and news are likely to be the first of many new categories monetized by Facebook.
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Online identity. While several large technology companies including Microsoft, Google, and Yahoo! have attempted to create single-sign-on access across multiple sites on the web, we think Facebook is the first company to truly crack the problem of a single online identity. We think Facebook could extend this concept with deeper verification and by convincing users to add credit card or other payment information which in turn would enable users to easily and safely transact and/or add/consume content across the web. Over time we expect Facebook to add additional micro transaction features, enabling bloggers, developers, and large news media outlets to easily charge users for online transactionswith Facebook collecting an incentive-based fee for logins or purchases on a site. In addition, we think the social signals and engagement of Facebook users on third-party sites create a richer experience for users on Facebook.com. Social commerce. We refer to social commerce as eCommerce conducted through a social networking site such as Facebook. As consumers become more comfortable trusting Facebook with their personal informationincluding credit card and payment datawe think they could be more likely to conduct a transaction on an online retailers Facebook app. In many instances, shopping in the physical world can be a social experience and we think Facebook can facilitate similar experiences online. For example, a user can have his/her Facebook friends select a shirt that matches a pair of pants selected on a Facebook merchants website. According to a Booz & Company study, social commerce is expected to drive $9B in sales of physical goods in 2012, reaching $30B by 2015, with the U.S. growing faster than the rest of the world. Several companies, both large and small, have begun to leverage social networks to drive eCommerce transactions. For example, 1-800-Flowers has built its eCommerce platform directly into its Facebook Fan page, allowing users to complete transactions directly on Facebook.com. The company also leverages Facebook birthday and calendar features to drive higher engagement when consumers are in the market for its products. We think Facebook also has the opportunity to create its own marketplace for secondary goods or partner with companies such as eBay and Craigslist to allow users to sell used items to their Facebook Friends or other users in their neighborhood.
Figure 20: Social Commerce Revenues Worldwide, U.S. vs. Rest of World, 2011-15
$ in billions
$35 $30 $25 $20 $15 $10 $5 $0 $9 $5 $4 $1 2011 $6 $3 2012 US $5 2013 Rest of world $14 $8 $9 2014 $12 $14 $20 $30
$16
2015
Source: Booz & Company, Turning Like to Buy: Social Media Emerges as a Commerce Channel, January 19, 2011.
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In addition, a 4Q11 survey of North American Internet users commissioned by Oracle suggests 19% of respondents indicated they had already purchased a product through a retailers Facebook page or that they were willing to do so suggesting both eCommerce players and Facebook need to improve the social shopping experience in order to make social commerce a compelling proposition for users.
Figure 21: Internet Users in North America Who Have Purchased Products via a Retailers Facebook Page, Q4 2011
% of Total
Have purchased products, 9% Do not use Facebook , 32% Would purchase products, 10%
Would never purchase products, 34%

Source: Oracle, Cross-Channel Commerce 2011: The Consumer View, November 2011.
Didn't know that I could do this on Facebook, 15%
Payments: Moving beyond gaming. We believe social gaming represents the largest portion of Facebooks Payments business and we think Zynga still drives the majority of Facebooks Payments revenue63% of Facebook Payments/Fees revenue in 1Q12. As it did with games, Facebook in our view can continue to leverage network effects to drive social media discovery beyond games to music, news, online video, connected TV, apps, and eBooks. For example, we think deep Facebook integration has been instrumental in Spotifys growth from 3M MAUs globally in September 2011 (pre-integration) to 22M MAUs in June 2012, according to AppData. The Spotify integration allows users to sign into Spotifys music service using their Facebook account so that a users Facebook Friends can view and join in to listening to a song with a user. We think the distribution and marketing effects of this kind of integration are powerful and see similar opportunities for deep integration with online video services such as Netflix in the intermediate term.
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Large Global Market Opportunity

Global User Growth
Of the current global population of ~7 billion people, IDC forecasts the number of Internet users globally to grow from ~2 billion in 2010 to ~2.7 billion in 2015. We expect Internet penetration to continue to grow, driven by the rapid adoption of connected mobile devices, particularly in emerging markets. Facebook currently has over 901M global users and aims to connect all Internet users through its desktop and mobile offerings.
Figure 22: Facebook Penetration Rates by Region
In millions
US & Canada Population Internet Users Facebook Users FB Pentration (%) Europe Population Internet Users Facebook Users FB Pentration (%) Asia Pacific Population Internet Users Facebook Users FB Pentration (%) Rest of World Population Internet Users Facebook Users FB Pentration (%)
2009 341 249 112 45% 2009 614 387 117 30% 2009 3,839 741 62 8% 2009 1,980 425 69 16%
2010 344 262 154 59% 2010 615 412 183 44% 2010 3,889 875 138 16% 2010 1,996 422 133 31%
2011 348 273 179 66% 2011 623 461 229 50% 2011 3,919 1,066 212 20% 2011 2,043 467 225 48%
Source: ITU, InternetWorldStats.com, BI, Company reports, and J.P. Morgan estimates.
With nearly 80% of its users accessing Facebook internationally, there is still a lot of headroom for user growth, particularly in large, underpenetrated markets. Penetration rates in the U.S. and U.K. are estimated to be over 60%, in Chile, Turkey, and Venezuela over 85%, in Brazil and Germany around 30%-40%, and in Japan, Russia, and South Korea 20% or lower. Though some of these countries have local social networks with dominant share, Facebooks global scale offers a unique offering that social networks focused on single markets can not provide. The one exception is China, a market that Facebook is currently not present in and may not be able to enter for the foreseeable future due to regulatory issues outside of the companys control. Other U.S. Internet companies including Google face similar issues in China.
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Figure 23: Facebook Monthly Average Users (MAUs) and Daily Average Users (DAUs)
In millions
MAU US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total 2010A 2011A 154 179 183 229 138 212 133 225 608 845 2012E 206 266 290 306 1,068 2013E 231 298 366 386 1,280 2014E 255 327 442 465 1,488
DAU US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total 2010A 2011A 99 126 107 143 64 105 57 109 327 483 2012E 149 180 153 164 646 2013E 171 216 209 232 828 2014E 191 251 263 297 1,002
38% 56% 123% 93% 69%
16% 25% 54% 69% 39%
15% 16% 37% 36% 26%
12% 12% 26% 26% 20%
11% 10% 21% 21% 16%
64% 58% 46% 43% 54%
70% 62% 50% 48% 57%
72% 68% 53% 53% 60%
74% 73% 57% 60% 65%
75% 77% 59% 64% 67%
Advertising Market
According to IDC, the total worldwide advertising market is estimated to have been $588 billion in 2010, of which online advertising excluding mobile accounted for $68 billion or 12% of total advertising. IDC projects online advertising to grow to $120 billion or 16% penetration by 2015. We think Facebooks market opportunity in the advertising market extends beyond the online display ad market, as it has the potential to attract branded ad budgets from offline channels and mobile advertising. Facebook offers advertising solutions that can be targeted to a higher degree than those other traditional offline and online advertising companies. We believe Facebooks social context, coupled with a highly engaged audience, should enable it to take significant share of online and offline advertising dollars.
Figure 24: Global Advertising Revenues, 2010
Figure 25: Global Advertising Revenues, 2015E

Google 3.7% Facebook 0.3%
2010
$588B
2015E
$770B
Google 7.1% Facebook 1.5%
Offline Advertising 88.5%
Other Online Advertising 7.5%
Offline Advertising 84.4%
Other Online Advertising 7.0%
Source: IDC, Company reports, and J.P. Morgan estimates.
Source: IDC, Company reports, and J.P. Morgan estimates.
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In the online marketing funnel, we view Facebook as an effective demand generator. Facebook helps advertisers market their brands or products to a wide audience to help users discover and create demand for new products and brands, as compared to demand fulfillment services such as Google search in which the user actively seeks a brand or item. Facebooks reach and scale with its database of social interactions make it an attractive platform for brand advertisers that previously relied on offline marketing channels for widespread brand exposure. IDC estimates that TV, print, and radio accounted for $363 million, or 62% of the total ad market, in 2010. We believe Facebook can help to attract a growing portion of the offline demand generation ad market as it provides a highly effective platform for brand and product discovery through online word-of-mouth marketing. According to Facebook, an advertiser could reach an audience of 65 million-plus U.S. users in December 2011. As a result, all of the top 100 largest global ad spenders ranked by Advertising Age in 2011 have been reported to advertise on Facebook. IDC estimates the worldwide mobile advertising market to grow from $2.9 billion in 2010 to $17.4 billion in 2015, equivalent to a 44% CAGR. Facebooks mobile users have been growing at a rapid pace, reaching 488M MAUs as of 1Q12, and outpacing Facebooks advertising revenue growth. According to Nielsen, the Facebook mobile app had more UVs (unique visitors) on Android and iPhone in the U.S. in 2011 than any other mobile app, highlighting the network effect through the mobile platform. Though 10.1% of U.S. adult time spent was on mobile devices, eMarketer estimates mobile ad spending share was only 0.9% in 2011. We believe a growing interest in mobile advertising from brand advertisers coupled with improving mobile ad formats suited for smaller screen sizes should help to bridge this disconnect between mobile time spent and mobile marketing spend.
Figure 26: Worldwide Mobile Ad Spend, 2010
Figure 27: Worldwide Mobile Ad Spend, 2015E
$2.9B
2010
U.S. Search Ads 17%
2015E
$17.4B
U.S. Search Ads 45%
International 69% U.S. Display Ads 14%
International 39%
U.S. Display Ads 16%
Source: IDC and J.P. Morgan estimates.
Source: IDC and J.P. Morgan estimates.
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Payments
According to NPD, global virtual and digital goods sales online were estimated to be $9 billion in 2011 and are forecast to reach $14 billion by 2016. Facebook generates Payments revenues through fees charged to platform developers, with a majority of its fees generated from virtual and digital goods sold through social games on its platform, with Zynga as its largest partner. We believe Facebook has the opportunity to expand its payments integration in the future beyond the games category into other verticals or types of paid apps, such as music, news, or movies. Beyond in-app purchases, Facebook could also expand its Payments platform to monetize its Open Graph partnerships or paid apps through the App Center. We recognize there may also be potential to enter the global eCommerce market of ~$821 billion by enabling social commerce, but we currently do not expect that to be a near-term focus for the company.
Figure 28: Virtual and Digital Goods Market, 2011
Figure 29: Virtual and Digital Goods Market, 2016E
2011
$9B
2016E
$14B
Virtual and Digital Goods 94%
Facebook 6%
Virtual and Digital Goods 77%
Facebook 23%
Source: NPD, Company reports, and J.P. Morgan estimates.
Source: NPD, Company reports, and J.P. Morgan estimates.
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Culture and Management

Emphasis on users Facebooks primary focus is to pursue its social mission of connecting users and strengthening relationships through its platform. We believe Facebooks emphasis on the user experience is central to how the business will be managed, as its success is highly correlated with user and engagement growth. This is evidenced by the companys reluctance to over-monetize its interface with larger and richer ads, despite the capability to do so. As such, we do not believe the company will engage in any strategy or launch any product that will hinder the user experience in any way, regardless of potential near-term financial benefits. While this may limit Facebooks near-term financial opportunities, we believe the companys value is highly correlated with user engagement and loyalty, and view the culture of valuing the user experience to be critical to the long-term growth of the platform. The Hacker Way Facebook has adopted the term hacker and embraced it as one of its core values. The Hacker Way refers to the approach of constantly building and innovating on its products and services. Mantras such as Move fast and break things reinforce the companys focus and pressure to keep innovating its product, technology, and services. We believe this type of innovative and fast-moving culture is an asset to the companys structure, given the fickle and trend-driven nature of the Internet and social networking sector. New sites such as Pinterest and Instagram have gained mass adoption at a rapid pace, resulting in Facebooks acquisition of Instagram ahead of its IPO. We believe Facebooks culture of constant innovation and shipping products quickly is essential to maintaining its leadership position in the highly competitive social networking and Internet space. Technology driven Facebook is a technology-driven company, as it relies on engineers to support and continue to build its platform. To support the website, Facebook invests in data centers, some of which are still capital leased and being converted to owned and operated through capital investments. Data centers are a critical asset to keeping the desktop and mobile sites operational, enabling better control by converting them to all O&O. We expect Facebook to continue to invest in data centers and other technology-related expenditures through continued capital investment over the next several years. Building a long-term, sustainable business We believe Facebook is a company that is being managed for the long term, as Mark Zuckerberg clearly states in his shareholder letter that Facebook doesnt build services to make money, but rather makes money to build better services. As such, management at times may make key investment decisions that could have negative implications in the near term but are designed for long-term, sustainable growth. We think a long-term focus coupled with rapid innovation and product launches may help prevent product decisions that could put user loyalty and experience at risk.
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Key Facebook Products and Features

The key components of the Facebook platform as it exists today include several product components that launched over the past few years. While some notable products, such as the Wall or Photos, have helped to drive user growth and engagement, other products have aided advertisers in leveraging Facebooks reach and social context to serve and create better ads.
Figure 30: Key Product Launches

Monthly Active Users (M) 1 6 12 Key Products Wall Photos Facebook Mobile API News Feed Facebook Platform 58 Self-service Ad Platform Pages 145 360 Chat Facebook Connect Like button Facebook Payments Graph API 608 Social Plugins Groups 845 Sponsored Stories Timeline Apps for Timeline Sponsored Stories in News Feed 901 Offers Sponsored Stories - Mobile Interest Lists Photo Viewer Enhancements Android App Shortcuts 958 (E) Facebook Camera Mobile App App Center 1,015 (E) Facebook Exchange iOS 6 Integration
Launch Sept 2004 Oct 2005 Apr 2006 Aug 2006 Sept 2006 May 2007 Nov 2007 Nov 2007 Apr 2008 Dec 2008 Feb 2009 May 2009 Apr 2010 Apr 2010 Oct 2010 Jan 2011 Sept 2011 Jan 2012 Jan 2012 Feb 2012 Mar 2012 Mar 2012 Mar 2012 Apr 2012 May 2012 Jun 2012 Summer Fall
Description Forum for users to post messages to friends Enabled users to upload photos Facebook available for mobile devices Developers to connect Scrolling updates Launched with 65 developers and 85 applications Enables advertisers to manage ad campaigns Profile pages for companies and brands Instant messaging capabilities Enables partner sites to allow users to login with Facebook accounts Button to indicate user preferences and recommendations Allows for in-app purchases using Facebook Credits Developer access to Facebook's social graph Lets users see what friends have liked, commented, shared across the web Allows users to organize groups around common interests and topics Advertisements built around user social interactions on right side of page New user profile interface on chronological basis Applications and widgets in Timeline profiles Ads with social context in News Feed New placements of Offers and update to Pages Ads with social context in mobile news feed Allows users to connect with people with similar interests Includes high resolution photos and full screen viewing Includes shortcuts to share photos and messages from home screen A mobile app to make photos faster to upload and access A new interface to discover social apps (desktop and mobile) Real-time-bidding Ad Exchange Deep integration with Apple mobile operating system
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Key User Products

Photos Launched in 2005, Facebook is one of the most popular photo uploading and sharing services on the Internet, with an average of 300M photos uploaded a day in 1Q12. Facebook users can upload an unlimited number of photos and set privacy settings to specify to whom they are visible. Users can add captions and tag people in the photos, a unique identifying feature that leverages users friend connections to enhance the usability and sharing capabilities of photos. We believe the Photos feature in Facebook has been one of the social networks greatest traffic drivers and expect it to be an important part of Facebooks future growth. News Feed The News Feed is the main interface of a users homepage which features scrolling headlines of all stories from a users friends, pages Liked, and interests. The News Feed is personalized based on the users friend connections and includes posts, photos, event updates, and Sponsored Stories. Updates are prioritized based on social signals of importance such as time, popularity of content among friends, and the type of content posted. The News Feed interface is also the main starting screen in mobile apps. According to comScore, users spend the highest percentage of their time (40%) on the News Feed, making it one of the most valuable ad spaces available to advertisers on Facebook. Timeline At the f8 conference in September 2011, Facebook announced Timeline, an updated version of the Facebook profile for both users and brand pages. Timeline enables users to organize and share content in a searchable personal narrative that is displayed chronologically. Timeline was rolled out broadly in 1Q12 with the ability to add apps and widgets to profiles.
Key Advertiser Products

Pages Facebook enables brands, advertisers, and companies to create Pages to engage and communicate with their users and customers. This free service provides brands and companies with a Facebook profile page that can be subscribed to and Liked. Advertisers and brands frequently promote links to their Facebook Pages in their major brand advertisements. Creating a Pages site is usually one of the first interactions between advertisers and Facebook, as it provides the ability for companies to experiment with social networking advertising without any direct investment. According to comScore, the Skittles brand attracted 320,000 unique visitors to its brand page on Facebook in March 2012, 14x more than it had on its www.skittles.com site in the same period. Ads and Sponsored Stories Facebook serves several types of online ads, among which there are several formats including traditional display ads, ads with social context, and Sponsored Stories. Advertisers can pay for these ads on a CPC or CPM basis, depending on what the ad campaign is designed to achieve. Facebook provides value to advertisers through its reach and scale of its 901M-plus users and unique targeting capabilities which include profile information, status updates, and relationships.
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First launched in January 2011, Sponsored Stories enable advertisers to re-broadcast posts from users friends or Pages in the form of an ad on the right side of the page. In January 2012 Sponsored Stories have been included into the News Feed, and in March into the mobile News Feed. We believe Sponsored Stories in News Feeds are likely to have a higher impact than display ads with social context, as they resemble regular News Feed updates so closely that many users may not even realize they are ads at all. Sponsored Stories leverage social connections to reinforce brands and ads, effectively allowing advertisers to purchase word-of-mouth marketing. According to Kenshoo Social, Sponsored Stories have the highest exposure rate among Facebooks ad formats, indicating that amplification works to get a brands message out, in addition to having nearly 2x the CTR as other Facebook ads. We believe this is an even greater factor on mobile devices with the audiences captive focus on the News Feed given the screen format of the mobile app, though mobile monetization levels may not be at par with desktop at this point.
Figure 31: Sponsored Stories Have Highest Exposure Rate of Facebook Ads
40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 0.5% Post Ad 1.2% Social Ad
36.0%
1.4% Sponsored Story Web Ad
Exposure Rate
Source: Kenshoo Social and J.P. Morgan estimates.
Facebook Premium and Reach Generator At the fMC event in February, Facebook announced a new premium advertising solution called Reach Generator, designed to help large clients looking to reach a higher percentage of their Fans through sponsored activity. Advertisers pay Facebook on an ongoing basis to sponsor a daily one-page post with the guarantee of reaching 75% of the pages fan base over the period of a month, extending the average reach of 16%, as seen in the figure below. An example of this was Ben & Jerrys which reported reaching 98% of its fan base and that every $1 spent on Facebook returned $3 in incremental sales as measured by Nielsen Marketing Mix Analysis.
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Key Developer Products

Platform, API, and Open Graph Platform, API, and Open Graph enable developers to leverage the Facebook user base to drive engagement on their own sites, mobile apps, or Facebook Apps. One example of this is users logging into partner sites or apps using their Facebook account, enabling the partner site or app to access the users friend lists and other information shared on Facebook. This enables a users Facebook profile to be used as their online identity without the need to create additional logins for sites that opt to develop and partner with Facebook. Though there is no direct economic inflow associated with these partnerships at this time, Facebook benefits through increased user engagement. We believe it is not inconceivable that Facebook may be able monetize these partnerships in some manner at some point. App Center In June, Facebook launched the App Center, an interface on both desktop and mobile that helps users discover new apps. A top-level App Center link is located at the topleft sidebar of the desktop page and within the left menu screen on mobile devices. It highlights and promotes apps that connect to Facebook, even those that only use FB Connect for authentication purposes. The App Center currently features 600-plus apps and is being rolled out on a limited basis. Developers can create an App Detail Page to describe their apps and incorporate social context (which friends use it), including direct links to install it into a Facebook.com account or to Apple App Store/Google Play on mobile devices. Facebook has added a tool in the Open Graph API that allows developers to see what devices users are using so that developers can create device-specific ads for those users. Facebook has also launched a beta program for paid apps that lets people pay a flat fee to use an app on Facebook.com. iOS 6 Integration At the Worldwide Developers Conference 2012, Apple announced a deep integration with iOS 6 and Facebook. We expect this integration to be a significant driver of user engagement as it lowers the barrier for iPhone and iPad users to post, update, and check information on Facebook. Signing into Facebook accounts directly in Apple iOS 6 allows for seamless content sharing from any interface on the iPhone and iPad. While this may not directly generate any significant revenue, we view any driver of increased engagement and content to be beneficial to Facebooks user engagement, which in turn should drive incremental advertising dollars.
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Figure 32: Facebook iOS 6 Integration
Source: Company site. Note: Used with permission.
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Current Business
User Growth and Engagement
Facebooks engagement continues to rise globally as comScore data shows an increasing percentage of minutes spent online are on Facebook. Accounting for ~3% of total minutes in 1Q09, worldwide users now spend ~14% of their time online on Facebook as of 1Q12. Engagement measured by Daily Average Users and Monthly Average Users supports this, showing an increase from ~47% to ~58% over a comparable time period.
Figure 33: Facebook Engagement Continues to Rise
20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
58.4% 14.2% 46.7%
60.0% 55.0% 50.0% 45.0%
3.3%
40.0% 35.0% 30.0%
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
% of Minutes Spent on FB
Source: Company reports, comScore, and J.P. Morgan estimates.
DAU / MAU
Advertising
Facebook currently generates nearly 80% of its revenues from online advertising, primarily consisting of targeted display ads. Facebook provides advertisers with a reach of over 901M users, high engagement metrics, and audience targeting capabilities that exceed those of any other platform both online and offline. Advertisers pay for ads displayed on Facebook on a clicks or impression basis with the ability to specify audience targeting by leveraging Facebooks database of user information and social actions. Facebook manages its advertising customer base either through direct sales or its self-service marketplace. Direct sales teams are assigned to brands and large advertisers to assist in managing ad campaigns across the Facebook platform. Smaller and individual advertisers can access all of the same advertising products through Facebooks self-service marketplace.
1Q12
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Ad Formats Facebook provides advertisers with two primary types of ad formats: standard display and display ads with social context such as sponsored stories. These ads are generally displayed on the right rail of the page. While both types of display ads can be highly targeted towards a specific demographic audience, ads with social context highlight a friends social interactions or connections to companies and brands through a users social network. According to comScore, 15.2% of all U.S. display ads were socially enabled in March 2012, up from 8.2% in November 2011. An example of an ad with social context can include a Like or comments, as seen in the example below.
Figure 34: Standard Display Ad Format Figure 35: Display Ad With Social Context
Source: Company website. Note: Used with permission.
Source: Company website. Note: Used with permission.
In January 2012, Sponsored Stories were integrated into the News Feed. According to comScore, users spend the highest percentage of their time (40%) on the News Feed, making it a more valuable ad space available to advertisers than any other parts of Facebook, even including brand pages. Sponsored Stories allow advertisers to rebroadcast social interactions between a users friends and brands, such as a Like action. We believe Sponsored Stories are designed to blend in with a users other News Feed headlines, making them a primary method of brand exposure. As of March 2012, Facebook integrated Sponsored Stories into the mobile app and News Feed. As Facebook reported an increase of 50%-plus in ad recall for Facebook ads with social context, we believe these types of ads will be a primary driver of advertising growth going forward. Data and Targeting Facebooks ad offering is differentiated for advertisers due to its massive scale and reach of users, large database of user information and social interactions, and the ability to amplify ads through social networks. Advertisers can target display ads to a subset of Facebooks users based on publicly shared information submitted by users. Such info can include general demographic characteristics such as age, gender, location, relationship status, or even specific interests indicated by the use of Facebooks Like button on various sites and partners. We believe this level of
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targeting exceeds the ability of other competing platforms, both offline and online, and is a feature that makes Facebook an integral part of brand ad campaigns. In addition to targeting, Facebooks ads with social context provide advertisers with the ability to differentiate by complementing their products and brands with recommendations from friends within a users direct social network. In an analysis of 79 ad campaigns, Facebook reported an increase of 50%-plus in ad recall for Facebook ads with social context compared to standard Facebook display ads. As advertisers increasingly see the value in ads on social networks, ads with social context should continue to proliferate. For a Facebook ad campaign to be effective on an advertiser ROI basis, there must be a comprehensive ad strategy around the campaign, in our view. While certain metrics, such as the number of fans for a brand page, are very easy to measure, we believe there is still some difficulty in calculating and measuring the performance and ROI of Facebook ad campaigns. A recent comScore study The Power of Like 2 highlights the importance of Fan Reach, Engagement, and Amplification. Fan Reach and Engagement are achieved through brand pages and interactions with fans, but amplification is a difficult metric to achieve and measure. Amplification refers to the brands ability to leverage its Fans to serve as a conduit for brand exposure to each of their own social networks. We believe advertisers are still in early stages of understanding, strategizing, and evaluating their Facebook ad campaigns and see potential for upside as ROI measurement continues to develop. Pricing and Revenue by Geography In 2011, half of Facebooks advertising revenues were generated in the U.S. and Canada, 32% in Europe, 10% in Asia, and 8% in the rest of the world.
Figure 36: Facebook Advertising Revenue by Geography

$ in millions
2010A Global Summary Global Advertising Revenue Y/Y Growth US & Canada Advertising Revenue Y/Y Growth % of Total Advertising Revenue Europe Advertising Revenue Y/Y Growth % of Total Advertising Revenue Asia Advertising Revenue Y/Y Growth % of Total Advertising Revenue ROW Advertising Revenue Y/Y Growth % of Total Advertising Revenue
2011A 3,154 69% 1,583 48% 50% 1,002 81% 32% 313 119% 10% 256 934% 8%
2012E 3,904 24% 1,755 11% 45% 1,136 13% 29% 552 76% 14% 460 80% 12%
2013E 5,104 31% 2,042 16% 40% 1,452 28% 28% 820 49% 16% 790 72% 15%
2014E 6,670 31% 2,363 16% 35% 1,883 30% 28% 1,160 41% 17% 1,264 60% 19%
1,868
1,071 57% 555 30% 143 8% 25 1%
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Facebook reported 2011 revenue per average MAU of $5.11 (advertising-only ARPU of $4.34), considerably lower than those of its online advertising peers such as Google or Yahoo!, as seen in the figure below. We estimate that, even on a CPM basis, Facebooks average CPM is in the range of $0.30-$0.40 in the U.S. and Canada, with other regional CPMs close to half of that or less. We believe the pricing discount is primarily attributed to the limited variety of ad formats for Facebooks display ads and the learning curve of how to leverage social media ads for advertisers. We expect pricing to continue to improve, potentially accelerated by Facebooks unique targeting capabilities and improving ad formats.
Figure 37: Facebook Revenue per User Compared to Other Internet Companies
$30.0 $28.26
Revenue / User 2011
$20.0
$10.0
$8.63
$7.49
$6.44
$5.11
$4.47
$3.91 $0.92
$0.0 GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren

Near-term growth drivers We believe the inclusion of Sponsored Stories in the desktop News Feed as of January will be a key driver of online ad growth in the near term. Not only does the News Feed represent the highest touch-point to the user, Sponsored Stories are rebroadcasts of real social interactions from friends and are nearly indistinguishable from regular updates. In our view, this adds a higher degree of credibility and trustworthiness to the ads that other display ads may be unable to achieve. While ads on the right rail may be automatically relegated as ads in the minds of users, News Feed Sponsored Stories blend in with all the other updates and leverage social connections to reinforce the ad exposure. We believe ads with social context such as Sponsored Stories will become a key addition to many brand advertisers on Facebook and help to drive advertising revenue growth. In March, Facebook launched Sponsored Stories for mobile apps and has subsequently begun to sell mobile-only News Feed ads. We believe Facebook may be able to charge a higher CPM for mobile-only Sponsored Stories than desktop CPMs, given the limited screen size on mobile devices and highly captive viewing experience. Mobile apps are also likely to have more frequent ad impressions than desktop ads as users can access the app anywhere, anytime. Though mobile user growth is currently outpacing the growth in advertising revenue contribution, we believe improving mobile ad formats such as location-based ads could become a source of advertising revenue growth going forward.
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Payments
In 2011, 59% of Facebooks payment revenues were generated in the U.S. and Canada, 28% in Europe, 9% in Asia, and 4% in the rest of the world.
Figure 38: Facebook Payments Revenue by Geography
$ in millions
2010A Payment and Other Fees Global Payments and Other Fees Y/Y Growth US & Canada Y/Y Growth % of Total Payment Revenue Europe Y/Y Growth % of Total Payment Revenue Asia Y/Y Growth % of Total Payment Revenue Rest of World Y/Y Growth % of Total Payment Revenue
2011A 557 425% 331 340% 59% 153 587% 28% 50 813% 9% 22 672% 4%
2012E 928 67% 526 59% 57% 269 76% 29% 93 86% 10% 40 76% 4%
2013E 1,409 52% 803 53% 57% 409 52% 29% 141 51% 10% 56 43% 4%
2014E 2,007 42% 1,104 37% 55% 592 45% 30% 221 57% 11% 90 60% 5%
106
75 71% 22 21% 6 5% 3 3%
Facebook generates its Payments revenue by charging fees to Platform developers for the sale of virtual and digital goods to users. At this time, the majority of Facebooks Payments revenue is generated from virtual good sales in social games. Zynga is the largest platform developer using Facebooks Payments platform, and contributed 12% of revenue in 2011 from Payments processing fees, with an additional 7% related to ads displayed on Zynga apps. Facebook has indicated it may seek to extend its Payments platform to other types of apps in the future with potentially varying fee structures. Currently, users purchase Facebook Credits as currency for digital or virtual goods bought on the platform. These credits are held as deposits until the user completes a purchase, at which time Facebook takes a 30% transaction fee and remits the remaining 70% to the developer. On June 19, Facebook announced two changes to its payment products: Subscriptions. Starting in July, Facebook plans to enable developers to offer subscription plans for in-app purchases of virtual items in social games. Developers will be able to manage recurring revenues and offer premium content to its paying subscribers. The first developers to test this are KIXEYE and Zynga. Currency pricing. Facebook is updating its Payments platform to support pricing in local currencies instead of Facebook Credits. This transition is to support developers that currently convert Facebook Credits to their own form of credits to circumvent local currency issues. Developers will be able to set prices on a market-by-market basis and this feature will be integrated into subscriptions.
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In June, Facebook launched the App Center, an app marketplace interface on both desktop and mobile designed to help users discover new apps. While most of the apps are expected to remain free and supported by in-app purchases, Facebook is offering developers a chance to sell paid apps by charging users flat fees to access their apps on Facebook. As the paid apps program is still in beta testing, the exact economics are not clear yet. We do not expect the App Center to drive incremental revenue at this time, as we view the App Center to be focused more on app discovery. We note that one interesting feature is the ability to push apps to mobile devices from the desktop interface. We believe in-app purchases of virtual and digital goods through social games will remain the primary revenue driver in the near term, as other social gaming companies beyond Zynga begin to expand their presence on the Facebook platform. Facebooks users are an attractive social gaming audience, as developers are able to leverage social connections between friends to promote games and increase engagement. In the long term, we look for other potential sources of Payments revenue to come from other verticals such as music, news, and possibly even movies, though we recognize that the fee structure may differ from the 70/30 split seen with social game developers.
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Financial Outlook
Addressing recent revenue deceleration in 4Q11 and 1Q12 Facebooks revenue growth decelerated to 55% Y/Y in 4Q11 and 45% Y/Y in 1Q12 from triple-digit growth in the first three quarters of 2011. We believe several factors in Facebooks advertising business contributed to this change, along with the underlying usage shift from desktop to mobile usage. 4Q11 had a difficult Y/Y comp as Facebook had significantly increased the number of ads displayed to users in 4Q10, resulting in higher advertising revenue in the year-ago period. Also during the quarter Facebook removed ads from photo pages for a period of time and increased pricing to improve ad quality on the site.
Figure 39: Facebook Revenue and Growth Rates by Quarter
$ in millions
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0
112%
108%
104% $1,131 $1,058 $1,105 $1,200
$1,468
120% 100% 80% 60%
$895 $731
$954 55%
45% 24% 26% 30%
40% 20% 0%
1Q11
2Q11
3Q11 4Q11A 1Q12A 2Q12E 3Q12E 4Q12E Revenue Y/Y Growth
1Q12 saw continued rapid shift in usage toward mobile, thereby negatively impacting revenue. In addition, we believe Facebook experienced softness in Europe and saw its mix shift of ads move more toward geographies with lower pricing such as Asia and ROW. We believe these factors may have extended into 2Q12 as well, and Facebook has specifically highlighted the trend of DAUs increasing more rapidly than the growth in ads delivered, with mobile cited as a primary factor. In addition, we believe Timeline pages initially showed fewer ads per page than previous profile pages. EBITDA margins declined in 1Q12 to 56.1% from the low 60s in 2011 partly due to slower revenue growth, but also due to: 1) increase in cost of revenues from higher data-center expenses and payment processing fees from rising Payments volume; 2) increase in sales and marketing due to an increase in user, developer, and advertiser-facing marketing as well as higher headcount in global sales, business development, and customer service; 3) higher R&D costs from an increase of 55% in employee headcount in engineering, design, product management, and other
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technical roles, and;4) higher G&A costs from increasing headcount-related expenses. In 2Q12, we expect continued heavy investments in products, mobile, new ad formats, and technology infrastructure. We model gross margins and EBITDA margins to trough in 2Q12 at 73.6% and 53.1%, respectively. In addition, we look for 2Q12 stock-based compensation of $1B. Expect reacceleration in revenue growth in 2H12 For the remainder of 2012, we forecast reacceleration in growth as we model 2Q12 to be the trough in both revenue growth and margins. We forecast 3Q12 and 4Q12 revenue growth of 26% Y/Y and 30% Y/Y, respectively, driving total 2012 revenue growth of 30%. We look for Facebooks newer ad formats to begin to show up in numbers in 2H12, particularly Sponsored Stories. 4Q12 will also benefit from a significantly easier Y/Y comp. We look for EBITDA margins to improve in 3Q12 and 4Q12 to 54.3% and 54.6% (vs. 53.1% in 2Q12), as we believe Facebook is efficiently increasing revenue through improved ad formats and Payments segment contribution. We expect Facebook to continue to make significant investments in technology, including building its own data centers, the first of which was completed in April 2011 in Oregon. We forecast capex spending of $1.7 billion in 2012 including capital leases, resulting in FCF of $845 million. Three-year outlook In the advertising segment, Facebook in our view will continue to improve its ad formats with greater social context and targeting capabilities. As advertisers continue to shift brand budgets online and increasingly focus on social networking, we believe Facebook can be a primary beneficiary. In Payments, Facebooks social games developer base is likely to continue expanding beyond Zynga to become a meaningful contributor to Facebooks revenues. In addition, we believe Facebook may find new ways to monetize its Payments platform to contribute to higher growth. We model acceleration in revenue growth to continue in 2013 to 35% Y/Y, with EBITDA margins expanding to 56.4%. In 2014, we forecast revenue growth of 33% and EBITDA margins of 57.3%. We look for Facebook to gain leverage in each of its cost lines as it improves its efficiency and scale in its advertising business, with increasing contributions from the Payments segment over the next three years. We expect Sales and Marketing to continue to be Facebooks largest operating cost item, followed by R&D, though we expect Y/Y revenue growth to outpace growth in operating expenses. We are modeling Facebook to continue investing in O&O data centers, with capex increasing to $1.8B (including capital leases) in 2014.
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Figure 40: Facebook Revenues and EBITDA Margins

$ in millions
$10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 2010 2011 Revenue
$8,677 $6,513 60.3% 61.9% $4,832 $3,711 $1,974 54.5% 56.4% 57.3%
80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0%
2012E
2013E
2014E
EBITDA Margin
Corporate income taxes and SBC. We expect Facebook to build a significant net operating loss in 2012 as a result of vesting of a significant number of RSUs and options. The companys 277 pre-2011 RSUs awarded to employees vest upon the satisfaction of both a service and liquidity conditionthe latter being satisfied six months after the companys IPO. As the liquidity condition had not been met prior to the IPO (up to 1Q12 financials), Facebook has not recognized any stock-based compensation related to these pre-2011 RSUs. However, given the IPO in 2Q12, the company will begin recording stock compensation expense related to the pre-2011 RSUs using the accelerated attribution method and, hence, we expect the company to record ~$1 billion in SBC in 2Q12, likely making the company unprofitable on a GAAP Net Income basis this quarter. In addition, SBC in 2013 will remain elevated due to recognition of pre-2011 RSUswe project 2013 SBC of $780M. The company expects ~277M shares underlying the pre-2011 RSUs to settle 151-181 days after the IPO and RSU holders will recognize taxable income based on the value of the shares on the date they are settled. RSUs will be net settled so Facebook will withhold ~122M shares of Class B common stock and Facebook will remit an equivalent dollar amount to the relevant tax authorities in cash. In order to fund this remittance, Facebook expects to sell shares roughly six months after the IPO in an amount equivalent to the tax withholding requirement mentioned above ~$4B or 122M shares based on a stock price of $33/share. Note that this share sale will not be dilutive but it will increase the public float in addition to the six-month lock-up expiration. In addition to the RSUs mentioned above, the company expects options equivalent to 185M shares of Class B stock to vest and settle in 2012. The exercise of the RSUs and options will result in a corporate income tax deduction of ~$14.4B based on FB stock trading at current levels ($33/share) upon settlement. The amount of this deduction exceeding the companys U.S. taxable income will result in a net operating loss (NOL) that can be used to receive a refund on taxes paid in 2010-11
45
a $500M refund payable in 2013and any portion of the NOL remaining after the carry-back can be used to offset U.S. taxable income in future years. We value Facebooks NOL at ~$4.3B by offsetting estimated U.S. pre-tax income through 2017 (discounted to present value) and recognizing a $500M refund in 2013.
Early Lock-Up Expirations Could Create Volatility in the Near Term

On May 18, Facebook offered 421.2M Class A shares in its IPO for $38 per share, at the top of the $34-$38 pricing range. Facebook sold 180M Class A shares with the remaining 241.2M Class A shares from prior investors. Facebook adopted a dualclass share structure between Class A and B shares, with Class A shares representing one vote each and Class B shares with ten votes each. Mark Zuckerberg exercised an option to purchase 120M Class B shares that can be converted immediately to Class A shares, of which he sold 30.2M Class A shares in the IPO. After the IPO, Mark Zuckerberg holds over 57% of the voting power in Facebook. As shown in the table below, Facebooks first tranche of 268M post-IPO Class A shares are unlocked on 8/16/12just three months after the companys IPO rather than the typical six-month lock-upand we believe this could increase volatility in the near term. In addition, as described in the companys S-1 filing, the companys IPO triggers the vesting of a large number of RSUs and Options with a very low cost basis, valued at ~$14B at current trading levels. For tax withholding purposes, Facebook will attempt to sell secondary shares worth roughly 45% of the vested RSUs/Options (~$4B) six months post its IPO. While no new shares will be sold in this transaction, the planned sale will increase overall supply.
Figure 41: Facebook Post-IPO Share Lock-Up Expiration Schedule

Date 05/17/2012 08/16/2012 11/14/2012 11/14/2012 12/14/2012 05/18/2013 Event IPO Lock-up Exp. Lock-up Exp. Lock-up Exp. Lock-up Exp. Lock-up Exp. Shares Outstanding 2623 2623 2623 2623 2623 2623 Additional Shares 421 268 247 1241 124 47 Ending Public Float 421 689 936 2177 2301 2348 Description 268M shrs held by selling stockholders excl Mark Zuckerberg ~137M RSUs, 55mm shrs and 55mm underlying options for Mark Zuckerberg 1,223M sh & 18M RSUs 124M sh held by selling stockholders other than Mark Zuckerberg 47M sh held by Mail.ru and DST
Source: Company reports and J.P. Morgan.
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Valuation
Our year-end 2013 price target of $45 on Facebook is derived using an average of a target EV/EBITDA multiple ($39 price/share) and our DCF analysis ($51 price/ share). We believe Facebook is a unique Internet asset with high revenue growth, strong competitive barriers, and significant upside potential as a key Internet platform, and therefore deserves to trade at a premium to most Internet names. We utilize a combination of a 2014E EV/EBITDA multiple and a DCF analysis to take into account Facebooks strong near-term financial profile and also the future potential of the Facebook platform. As noted throughout our report, we believe there are many material growth drivers for Facebook in the coming years. We believe Facebook will be most often comped against LinkedIn given both companies social characteristics, strong financial profiles, and early-stage natures. However, in addition to LinkedIn, we also look at Facebook relative to a group of high-growth Internet leaders including Google, Amazon, Tencent, Baidu, Priceline, Zynga, and Mail.ru Group.
Figure 42: High-Growth Internet Comparables

$ in millions
Company Primary Comps Google Inc Amazon.com Inc Tencent Holdings Ltd Baidu Inc priceline.com Inc LinkedIn Corp Zynga Inc Mail.ru Group Ltd Mean Median Facebook - Current Facebook - EV/EBITDA PT Facebook - Final PT FB FB FB $33.10 $39.00 $45.00 82,750 97,500 112,500 67,374 82,124 97,124 Prices as of 6/26/2012 GOOG AMZN TCTZF BIDU PCLN LNKD ZNGA MAIL LI $564.68 $225.61 $28.30 $110.59 $656.36 $106.42 $5.77 $31.34 Market Cap 188,115 104,288 51,689 39,267 33,898 12,085 4,984 6,552 EV 133,685 90,356 48,744 35,995 30,795 11,344 3,721 6,026 2012 3.8x 1.4x 7.5x 10.1x 5.8x 12.5x 2.4x 8.9x 6.6x 6.6x 13.9x 17.0x 20.1x EV/Revenue 2013 2014 2.9x 1.1x 5.6x 6.8x 4.5x 8.7x 1.8x 6.7x 4.8x 5.0x 10.7x 13.2x 13.2x 2.2x 0.8x 4.2x 4.9x 3.5x 6.5x 1.3x 5.3x 3.6x 3.8x 8.0x 9.8x 9.8x 2012 7.0x 23.5x 17.2x 18.0x 15.4x 62.6x 8.0x 17.7x 21.2x 17.4x 25.6x 31.2x 36.9x EV/EBITDA 2013 2014 5.4x 16.5x 13.0x 12.2x 11.3x 36.6x 4.9x 13.1x 14.1x 12.6x 19.0x 23.3x 23.3x 4.0x 11.9x 10.0x 9.0x 8.4x 24.0x 3.3x 10.2x 10.1x 9.5x 13.9x 17.1x 17.1x 2012 13.3x 78.2x 25.2x 23.8x 20.8x 166.9x 18.8x 26.9x 46.7x 24.5x 66.5x 78.4x 90.4x P/E 2013 11.4x 52.2x 19.9x 17.0x 16.1x 79.2x 12.5x 20.7x 28.6x 18.4x 50.5x 59.5x 68.7x 2014 9.8x 40.8x 16.1x 13.4x 13.2x 49.3x 10.2x 16.9x 21.2x 14.8x 36.0x 42.5x 49.0x 33% 33% 33% 11-14 Rev CAGR 18% 27% 33% 42% 21% 50% 24% 26% 2012 9.9x 31.9x 20.8x 22.6x 20.2x 102.2x 82.2x 25.3x 39.4x 23.9x 84.8x 102.3x 120.0x EV/FCF 2013 7.7x 19.1x 15.0x 15.6x 14.4x 69.6x 6.9x 16.3x 20.6x 15.3x 40.2x 48.8x 48.8x 2014 5.6x 13.7x 11.4x 11.0x 10.6x 56.6x 4.6x 12.5x 15.7x 11.2x 25.3x 30.9x 30.9x Ratings Covering Analyst OW OW OW OW OW OW OW OW Doug Anmuth Doug Anmuth Dick Wei Dick Wei Doug Anmuth Doug Anmuth Doug Anmuth Alexei Gogolev
OW
Doug Anmuth
Source: Bloomberg and J.P. Morgan estimates.
Relative Valuation EV/EBITDA. We apply a target EV/EBITDA multiple of 17x on our 2014E EBITDA of $5B which implies a $39 stock price. Facebook currently trades at 19x on a 2013E EV/EBITDA basis, and we assume a slight step down for looking an incremental year out. We believe the company deserves a premium to most Internet peers based on its high growth potential and strong network effects. However, we would expect LinkedIn to receive a higher multiple based on its significantly higher growth rate, subscription-based revenue characteristics, transparent model, and early public track record of beating numbers. P/E. Facebook trades at 51x our 2013 PF EPS estimate of $0.66 versus highgrowth comps such as Amazon and LinkedIn trading at 52x and 79x 2013E EPS, respectively. At our $45 price target Facebook would trade essentially in line with LNKD on a PF EPS basis.
47
EV/FCF. On an EV/FCF basis, Facebook trades at 40x our 2013 FCF estimate of $1.9B. Amazon and LinkedIn trade at 2013E FCF multiples of 19x and 70x, respectively. EV/Revenue. On an EV/Revenue basis, Facebook currently trades at 11x our 2013 revenue estimate of $6.5B, above other higher-growth Internet peers trading in a range of 6-8x. DCF analysis Our DCF analysis supports a valuation of $51 per share. Our DCF assumes a discount rate of 11% based on a more normalized 10-year Treasury of 3%, estimated beta of 1.30, an equity risk premium of 5.50%, and a bit more conservatism. We assume a 3% terminal growth rate which is in line with to a bit below that utilized when looking at other high-growth Internet names. Our DCF incorporates an estimated 2012-2020 revenue CAGR of 26% and an EBITDA CAGR of 27%. In addition, we include a sensitivity analysis around our DCF assumptions in the figure below.
Figure 43: Facebook DCF Analysis

$ in millions except per-share data
Revenue % Change Adjusted EBITDA % Change % margin Cash Taxes Capex PP&E acquired under capital leases Change in Working Capital Unlevered Free Cash Flow % Change 2012E 4,832.0 30.2% 2,635.1 14.8% 54.5% (207.9) (1,331.1) (398.0) 76.6 774.6 47.0% 2013E 6,512.8 34.8% 3,672.1 39.4% 56.4% (184.3) (1,367.7) (423.3) 58.9 1,755.8 126.7% 2014E 8,676.8 33.2% 4,973.9 35.4% 57.3% (346.5) (1,475.1) (459.9) 67.9 2,760.3 57.2% 2015E 11,323.3 30.5% 6,533.7 31.4% 57.7% (585.3) (1,585.3) (509.5) 63.7 3,917.3 41.9% 2016E 14,592.1 28.9% 8,464.8 29.6% 58.0% (2,207.7) (1,721.9) (576.4) 67.1 4,025.9 2.8% 2017E 18,094.2 24.0% 10,496.3 24.0% 58.0% (3,358.8) (2,171.3) (542.8) 100.0 4,523.3 12.4% 2018E 21,894.0 21.0% 12,700.5 21.0% 58.0% (4,064.2) (2,627.3) (656.8) 100.0 5,452.2 20.5% 2019E 25,835.0 18.0% 14,986.6 18.0% 58.0% (4,795.7) (3,100.2) (775.0) 100.0 6,415.6 17.7% 2020E 29,968.6 16.0% 17,384.5 16.0% 58.0% (5,563.0) (3,596.2) (899.1) 100.0 7,426.2 15.8%
Terminal EBITDA Multiple Discount Rate Terminal Value Implied Terminal FCF Multiple Present Value of FCF Present Value of Terminal Value Implied Firm Value Gross Cash Balance PV of Future Tax Benefits Plus: Total Cash Less: Debt Implied Equity Value Fully Diluted Shares Outstanding Equity Value Per Share
12.9x 11.0% 223,825.0 30.1x 19,842 87,498.7 107,341.0
12.9x 11.0% 223,825.0 30.1x 21,250 97,123.6 118,373.9 DCF Sensitivity Analysis
Adjusted EBITDA Terminal Multiple 10.9x 8.0% Discount Rate 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% $54 $51 $48 $46 $43 $41 $39 11.9x $58 $54 $51 $48 $46 $43 $41 12.9x $61 $58 $54 $51 $48 $46 $43 13.9x $65 $61 $57 $54 $51 $48 $46 14.9x $68 $64 $60 $57 $54 $51 $48
11,079.7 13,858.7 4,296.2 4,762.1 15,375.9 18,620.8 122,716.9 136,994.7 2,500.0 $49.09 2,675.0 $51.21
Source: Company data and J.P. Morgan estimates.
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Figure 44: J.P. Morgan Internet Comps

(US$, millions except per share) Company Symbol JP Morgan Rating Price as of 6/26/2012 Shares Outstanding 2012 Shares Outstanding 2013 Shares Outstanding 2014 2,010 Market Capitalization 2,010 Total Enterprise Value 2012 Total Enterprise Value 2013 Total Enterprise Value 2014 EARNINGS PER SHARE (EPS)(1) EPS 2012 EPS 2013 EPS 2014 2011 - 2014 EPS CAGR P/E 2012 P/E-to-Growth P/E 2013 P/E 2014 FREE CASH FLOW (FCF) FCF 2012 FCF 2013 FCF 2014 2011-2014 FCF CAGR FCF/Share 2012 FCF/Share 2013 FCF/Share 2014 Price/FCF 2012 P/FCF-to-Growth Price/FCF 2013 Price/FCF 2014 FCF Yield 2012 FCF Yield 2013 FCF Yield 2014 EBITDA EBITDA 2012 EBITDA 2013 EBITDA 2014 2011-2014 EBITDA CAGR EV/EBITDA 2012 EV/EBITDA-to-Growth EV/EBITDA 2013 EV/EBITDA 2014 REVENUE 2,010 Revenue 2012 Revenue 2013 Revenue 2014 2011-2014 Revenue CAGR 2,010 $19,180 $22,529 $26,326 18% 7.0x 0.4x 5.4x 4.0x $34,841 $41,145 $47,903 18% $2,635 $3,672 $4,974 29% 25.6x 0.9x 19.0x 13.9x $4,832 $6,513 $8,677 33% $1,649 $1,773 $1,857 3% 2.9x 0.8x 2.0x 1.3x $4,521 $4,664 $4,781 3% $4,429 $5,040 $5,706 14% 10.4x 0.7x 8.3x 6.6x $13,733 $15,749 $17,611 15% $3,810 $5,186 $6,758 37% 24.4x 0.7x 17.2x 12.4x $61,837 $78,033 $96,088 26% $137 $338 $558 5% 24.0x 4.7x 9.1x 5.4x $3,575 $4,065 $4,728 14% $1,994 $2,596 $3,210 29% 15.6x 0.5x 11.4x 8.5x $5,349 $6,544 $7,800 21% $762 $867 $958 10% 8.3x 0.8x 7.0x 5.5x $3,854 $4,248 $4,633 10% 1.7x 1.5x 1.4x $347 $421 $499 16% 17.4x 1.1x 14.1x 11.5x $781 $938 $1,099 20% 7.7x 6.6x 5.7x $181 $312 $477 69% 64.8x 0.9x 37.9x 24.8x $904 $1,305 $1,766 50% 13.4x 9.4x 7.1x $380 $916 $1,166 NM 14.4x NA 5.7x 3.8x $2,372 $3,114 $3,661 31% 2.9x 2.3x 2.0x $464 $687 $857 41% 7.5x 0.2x 4.5x 3.0x $1,522 $1,904 $2,216 24% 3.3x 2.7x 2.4x -$10 -$5 $44 155% NM NA NM NM $425 $606 $823 44% 4.1x 2.9x 2.2x $79 $102 $131 25% 19.2x 0.8x 14.3x 10.6x $279 $344 $418 22% 6.4x 5.3x 4.4x $169 $206 $245 22% 11.1x 0.5x 8.7x 6.8x $542 $641 $730 20% 3.3x 2.9x 2.5x $27 $40 $50 38% 5.9x 0.2x 3.8x 2.6x $232 $293 $346 25% 1.1x 0.9x 0.8x $20 $31 $45 41% 10.4x 0.3x 6.1x 3.5x $446 $528 $618 18% 0.7x 0.6x 0.5x $72 $70 $74 -7% 5.5x NM 4.9x 4.0x $363 $350 $363 -3% 1.2x 1.2x 1.2x Google GOOG
OW
$564.68 333 338 343 $188,115 $135,011 $122,182 $106,378 $42.55 $49.54 $57.88 17% 13.3x 0.8x 11.4x 9.8x $13,544 $15,730 $18,706 19% $40.66 $46.52 $54.51 13.9x 0.7x 12.1x 10.4x 7.2% 8.2% 9.7%
Facebook FB OW $33.10 2,500 2,675 2,729 $82,750 $67,374 $69,922 $69,123 $0.50 $0.66 $0.92 22% 66.5x 3.0x 50.5x 36.0x $845 $1,856 $2,885 83% $0.34 $0.69 $1.06 97.9x 1.2x 47.7x 31.3x 1.0% 2.1% 3.2%
Yahoo! YHOO N $15.35 1,229 1,234 1,239 $18,866 $4,749 $3,610 $2,466 $1.13 $1.20 $1.30 11% 13.6x 1.2x 12.8x 11.8x $1,324 $1,216 $1,220 15% $1.08 $0.98 $0.98 14.3x 1.0x 15.6x 15.6x 7.0% 6.4% 6.4%
eBay EBAY N $42.50 1,316 1,326 1,336 $55,909 $46,115 $41,816 $37,636 $2.30 $2.69 $3.12 15% 18.5x 1.2x 15.8x 13.6x $3,404 $3,953 $4,534 25% $2.59 $2.98 $3.40 16.4x 0.7x 14.3x 12.5x 6.1% 7.0% 8.0%
Amazon AMZN OW $225.61 462 465 468 $104,288 $92,917 $89,014 $83,722 $2.82 $4.24 $5.45 23% 79.9x 3.5x 53.2x 41.4x $2,833 $4,529 $5,919 45% $6.13 $9.74 $12.64 36.8x 0.8x 23.2x 17.8x 2.7% 4.3% 5.6%
Netflix NFLX N $66.80 55 55 55 $3,645 $3,295 $3,078 $3,028 $0.97 $3.39 $5.93 7% 68.6x 10.1x 19.7x 11.3x $76 $39 $30 -47% $1.39 $0.71 $0.54 47.9x -1.0x 93.6x 124.3x 2.1% 1.1% 0.8%
Priceline.com PCLN OW $656.36 51.645 52.345 52.945 $33,898 $31,038 $29,468 $27,317 $31.63 $40.65 $49.65 28% 20.8x 0.7x 16.1x 13.2x $1,528 $2,029 $2,545 25% $29.59 $38.77 $48.07 22.2x 0.9x 16.9x 13.7x 4.5% 5.9% 7.3%
Expedia EXPE N $46.40 139 138 137 $6,429 $6,340 $6,027 $5,225 $2.76 $3.33 $3.89 12% 16.8x 1.4x 14.0x 11.9x $691 $752 $815 10% $4.98 $5.46 $5.97 9.3x 1.0x 8.5x 7.8x 10.7% 11.8% 12.9%
TripAdvisor TRIP N $44.01 138 140 142 $6,054 $6,053 $5,934 $5,736 $1.55 $1.85 $2.18 14% 28.4x 2.0x 23.8x 20.2x $203 $241 $285 13% $1.47 $1.72 $2.00 29.8x 2.3x 25.6x 22.0x 3.4% 3.9% 4.6%
LinkedIn LNKD OW $106.42 114 116 118 $12,085 $11,726 $11,804 $11,848 $0.64 $1.34 $2.16 82% 166.9x 2.0x 79.2x 49.3x $111 $164 $202 66% $0.98 $1.42 $1.71 108.9x 1.7x 75.2x 62.1x 0.9% 1.3% 1.6%
Groupon GRPN N $10.25 674 704 725 $6,905 $5,462 $5,226 $4,439 $0.14 $0.87 $1.14 NM 72.4x NA 11.8x 9.0x $345 $603 $996 51% $0.51 $0.86 $1.37 20.0x 0.4x 12.0x 7.5x 5.0% 8.4% 13.4%
Zynga ZNGA OW $5.77 865 890 908 $4,984 $3,461 $3,123 $2,597 $0.31 $0.46 $0.57 33% 18.8x 0.6x 12.5x 10.2x $45 $488 $629 61% $0.05 $0.55 $0.69 110.1x 1.8x 10.5x 8.3x 0.9% 9.5% 12.0%
Pandora P OW $10.36 169 172 176 $1,751 $1,679 $1,722 $1,739 -$0.10 -$0.07 $0.18 NM NM NM NM 59.1x -$20 -$8 $19 NM -$0.12 -$0.05 $0.11 NM NA NM 98.1x -1.2% -0.4% 1.0%
HomeAway AWAY OW $20.48 86 88 90 $1,770 $1,517 $1,459 $1,387 $0.50 $0.67 $0.90 20% 41.3x 2.1x 30.7x 22.7x $74 $93 $108 19% $0.86 $1.06 $1.21 23.8x 1.2x 19.4x 17.0x 4.2% 5.2% 5.9%
Bankrate RATE N $17.79 102 103 104 $1,809 $1,874 $1,782 $1,660 $0.84 $1.06 $1.34 29% 21.1x 0.7x 16.8x 13.3x $73 $120 $146 51% $0.72 $1.16 $1.40 24.8x 0.5x 15.3x 12.7x 4.0% 6.5% 7.9%
CafePress PRSS OW $14.22 17 18 18 $245 $158 $150 $131 $0.81 $1.13 $1.43 35% 17.6x 0.5x 12.6x 10.0x $15 $20 $25 29% $0.89 $1.08 $1.34 16.0x 0.6x 13.1x 10.6x 6.3% 7.6% 9.4%
ReachLocal RLOC OW $10.70 29 29 30 $311 $210 $187 $155 $0.34 $0.41 $0.69 30% 31.1x 1.0x 26.1x 15.6x $19 $26 $35 61% $0.67 $0.89 $1.17 16.1x 0.3x 12.0x 9.1x 6.2% 8.3% 11.0%
Quinstreet QNST N $9.27 47 46 46 $434 $400 $341 $295 $0.83 $0.88 $0.91 -4% 11.2x NM 10.5x 10.2x $53 $53 $55 -8% $1.14 $1.16 $1.19 8.2x -1.0x 8.0x 7.8x 12.3% 12.5% 12.9%
2,010
Market Cap/Revenue 2012 5.4x 17.1x 4.2x 4.1x 1.7x 1.0x 6.3x Market Cap/Revenue 2013 4.6x 13.6x 4.1x 3.6x 1.3x 0.9x 5.3x Market Cap/Revenue 2014 4.0x 10.4x 4.0x 3.2x 1.1x 0.8x 4.5x Notes: 1) All EPS shown are Pro Forma, to exclude the impact of stock based compensation. 2) P/E and P/FCF for Yahoo! does not adjust for Yahoo! Japan 3) Pandora's calendar year estimates are used (e.g., FY2012 equates to ~CY2011. QuinStreet's FY estimates (with a June year-end) are used. Source: Company reports and JP Morgan estimates
Source: Company reports and J.P. Morgan estimates. 49
Financial Models
Figure 45: Facebook Income Statement
$ in millions
Revenue Cost of Revenue Gross Profit Operating Expenses Marketing and Sales Research and Development General and Administrative Stock-based Compensation Total Operating Expenses Operating Income PF Operating Income Other income (expense), net Pre-tax Income Income Taxes Effective Tax Rate GAAP Net Income GAAP EPS Diluted Shares Out Non-GAAP Pre-tax Income Income Taxes Effective Tax Rate Non-GAAP Net Income Non-GAAP EPS EBITDA Calculation Operating Income Stock-based compensation Depreciation and Amortization EBITDA 2010A 1,974 493 1,481 182 135 112 20 449 1,032 1,052 (24) 1,008 402 40% 606 2011A 3,711 851 2,860 384 274 229 217 1,104 1,756 1,973 (61) 1,695 695 41% 1,000 $0.43 2,332 1,912 732 38% 1,180 $0.51 1Q12A 1,058 273 785 136 93 72 103 404 381 484 1 382 177 46% 205 $0.09 2,361 485 192 40% 293 $0.12 2Q12E 1,105 292 814 175 109 92 1,000 1,376 (562) 438 18 (544) 68 NA (613) ($0.25) 2,451 456 182 40% 273 $0.11 3Q12E 1,200 308 892 196 119 102 210 627 265 475 26 292 122 42% 169 $0.07 2,554 502 201 40% 301 $0.12 4Q12E 1,468 377 1,091 225 141 125 257 747 344 601 27 371 148 40% 222 $0.08 2,634 628 251 40% 377 $0.14 2012E 4,832 1,251 3,581 731 462 391 1,570 3,154 428 1,998 72 500 516 103% (16) ($0.01) 2,500 2,070 826 40% 1,244 $0.50 2013E 6,513 1,661 4,852 977 606 495 780 2,858 1,994 2,774 100 2,094 921 44% 1,173 $0.44 2,675 2,874 1,121 39% 1,753 $0.66 2014E 8,677 2,152 6,525 1,284 772 616 677 3,349 3,176 3,852 124 3,300 1,386 42% 1,914 $0.70 2,729 3,977 1,471 37% 2,505 $0.92
1,032 20 139 1,191 2010A
1,756 217 323 2,296 2011A 88% 73% 93% 111% 103% 104% 985% 146% 70% 88% 65%
381 103 110 594 1Q12A 45% 63% 39% 100% 75% 50% 1371% 130% -2% 23% -12% -13% 20% 33% -6% -30% -22% -18%
(562) 1,000 149 587 2Q12E 24% 41% 18% 90% 71% 50% 1463% 390% -238% -7% -355% -343% -8% 6% 4% -248% -10% -1% 26.4% 73.6% 15.8% 9.9% 8.3% 90.5% -50.9% 39.6% 53.1%
265 210 177 652 3Q12E 26% 32% 24% 81% 58% 89% 200% 104% -36% -2% -26% -32% -2% 14% 9% -147% 9% 11% 25.7% 74.3% 16.3% 9.9% 8.5% 17.5% 22.1% 39.6% 54.3%
344 257 201 802 4Q12E 30% 55% 23% 94% 72% 92% 238% 120% -37% -4% -26% -35% -11% 10% 22% 30% 26% 23% 25.7% 74.3% 15.3% 9.6% 8.5% 17.5% 23.4% 40.9% 54.6%
428 1,570 637 2,635 2012E 30% 47% 25% 90% 69% 71% 624% 186% -76% 1% -102% -102% -2% 15%
1,994 780 898 3,672 2013E 35% 33% 35% 34% 31% 27% -50% -9% 366% 39% NM NM 32% 39%
3,176 677 1,121 4,974 2014E 33% 30% 34% 31% 27% 24% -13% 17% 59% 39% 63% 60% 40% 35%
Y/Y Growth Revenue Cost of Revenue Gross Profit Marketing and Sales Research and Development General and Administrative Stock-based Compensation Total Operating Expenses Operating Income PF Operating Income GAAP Net Income GAAP EPS Non-GAAP EPS EBITDA Q/Q Growth Revenue Operating Income PF Operating Income EBITDA % of Revenue Cost of Revenue Gross Profit Marketing and Sales Research and Development General and Administrative Stock-based Compensation Operating Income PF Operating Income EBITDA
154% 121% 167% 61% 67% 58% -26% 54% 294% 264% 165%
225%
93%
25.0% 75.0% 9.2% 6.8% 5.7% 1.0% 52.3% 53.3% 60.3%
22.9% 77.1% 10.3% 7.4% 6.2% 5.8% 47.3% 53.2% 61.9%
25.8% 74.2% 12.9% 8.8% 6.8% 9.7% 36.0% 45.7% 56.1%
25.9% 74.1% 15.1% 9.6% 8.1% 32.5% 8.8% 41.3% 54.5%
25.5% 74.5% 15.0% 9.3% 7.6% 12.0% 30.6% 42.6% 56.4%
24.8% 75.2% 14.8% 8.9% 7.1% 7.8% 36.6% 44.4% 57.3%
50
Figure 46: Facebook Segment Summary

$ in millions
2010A Summary Advertising Y/Y Growth Q/Q Growth % of Total Revenues Payments and Other Fees Y/Y Growth Q/Q Growth % of Total Revenues Total Revenue Y/Y Growth Q/Q Growth Seasonality Revenue per MAU (ARPU) Summary US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total Q/Q Growth US & Canada Europe Asia Rest of World Total Geographic Revenue Breakdown Based on User Location US & Canada Europe Asia Rest of World Total % of Total US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total 1,868 145% 95% 106 715% 5% 1,974 154% 1Q11 637 87% -3% 87% 94 1780% 24% 13% 731 112% 0% 20% 2Q11 776 83% 22% 87% 119 1388% 27% 13% 895 108% 22% 24% 3Q11 798 77% 3% 84% 156 818% 31% 16% 954 104% 7% 26% 4Q11A 943 44% 18% 83% 188 147% 21% 17% 1,131 55% 19% 30% 2011A 3,154 69% 85% 557 425% 15% 3,711 88% 1Q12A 872 37% -8% 82% 186 98% -1% 18% 1,058 45% -6% 22% 2Q12E 890 15% 2% 81% 215 81% 16% 19% 1,105 24% 4% 23% 3Q12E 957 20% 7% 80% 244 56% 13% 20% 1,200 26% 9% 25% 4Q12E 1,185 26% 24% 81% 284 51% 16% 19% 1,468 30% 22% 30% 2012E 3,904 24% 81% 928 67% 19% 4,832 30% 2013E 5,104 31% 78% 1,409 52% 22% 6,513 35% 2014E 6,670 31% 77% 2,007 42% 23% 8,677 33%
$8.62 $3.85 $1.49 $0.27 $4.08
$2.49 $1.19 $0.42 $0.31 $1.14
$2.84 $1.33 $0.50 $0.39 $1.26
$2.80 $1.34 $0.56 $0.40 $1.24
$3.19 $1.60 $0.56 $0.41 $1.38
$11.50 $5.61 $2.08 $1.56 $5.11
$2.86 $1.40 $0.53 $0.37 $1.21
$2.87 $1.25 $0.60 $0.41 $1.19
$2.82 $1.28 $0.69 $0.51 $1.22
$3.21 $1.71 $0.73 $0.56 $1.41
$11.86 $5.68 $2.57 $1.88 $5.05
$13.04 $6.61 $2.93 $2.45 $5.55
$14.29 $8.08 $3.42 $3.19 $6.27
32%
41% 58% 37% 82% 30%
52% 49% 37% 72% 34%
45% 59% 59% 77% 37%
16% 29% 23% 21% 9%
33% 46% 40% 468% 25%
15% 17% 27% 19% 7%
1% -6% 21% 6% -6%
1% -4% 22% 29% -2%
0% 6% 29% 39% 3%
3% 1% 24% 21% -1%
10% 16% 14% 30% 10%
10% 22% 17% 30% 13%
-10% -4% -8% -7% -10%
14% 12% 18% 24% 11%
-1% 1% 13% 2% -2%
14% 20% 0% 3% 11%
-10% -13% -5% -9% -12%
0% -10% 13% 11% -2%
-2% 2% 14% 24% 2%
14% 33% 6% 11% 16%
1,146 577 149 28 1,900
394 229 62 46 731
471 275 82 67 895
482 290 104 77 954
567 361 115 88 1,131
1,914 1,155 363 278 3,711
525 328 118 87 1,058
549 308 145 104 1,105
557 324 179 141 1,200
651 445 204 168 1,468
2,282 1,406 645 500 4,832
2,845 1,860 961 847 6,513
3,467 2,475 1,380 1,355 8,677
60% 30% 8% 1% 100%
54% 31% 8% 6% 100%
53% 31% 9% 7% 100%
51% 30% 11% 8% 100%
50% 32% 10% 8% 100%
52% 31% 10% 8% 100%
50% 31% 11% 8% 100%
50% 28% 13% 9% 100%
46% 27% 15% 12% 100%
44% 30% 14% 11% 100%
47% 29% 13% 10% 100%
44% 29% 15% 13% 100%
40% 29% 16% 16% 100%
84% 139% 182% 254% 112%
89% 113% 156% 228% 108%
78% 117% 182% 210% 104%
38% 66% 100% 102% 55%
67% 100% 145% 907% 95%
33% 43% 90% 89% 45%
16% 12% 76% 56% 24%
15% 12% 72% 82% 26%
15% 23% 77% 90% 30%
19% 22% 78% 79% 30%
25% 32% 49% 69% 35%
22% 33% 44% 60% 33%
51
Figure 47: Facebook Revenue DriversUsers

$ in millions
2010A User Metrics Monthly Active Users (MAU) US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total Country Mix US & Canada Europe Asia Rest of World Total Mobile MAU Y/Y Growth Q/Q Growth % of total MAUs Mobile-Only MAU Y/Y Growth Q/Q Growth % of total MAUs Web and Mobile MAU Y/Y Growth Q/Q Growth % of total MAUs Web Only MAU Y/Y Growth Q/Q Growth % of total MAUs Daily Active Users (DAU) US & Canada Europe Asia Rest of World Total DAU as % of MAU US & Canada Europe Asia Rest of World Total Y/Y Growth US & Canada Europe Asia Rest of World Total Country Mix US & Canada Europe Asia Rest of World Total 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
154 183 138 133 608
179 229 212 225 845
188 241 230 242 901
194 250 249 265 958
201 256 270 288 1,015
206 266 290 306 1,068
206 266 290 306 1,068
231 298 366 386 1,280
255 327 442 465 1,488
38% 56% 123% 93% 69%
16% 25% 54% 69% 39%
15% 20% 47% 51% 33%
15% 18% 43% 44% 30%
14% 16% 38% 39% 27%
15% 16% 37% 36% 26%
15% 16% 37% 36% 26%
12% 12% 26% 26% 20%
11% 10% 21% 21% 16%
25% 30% 23% 22% 100% 245 143% 40.3% 15 -2.5% 230 128% 37.8% 363 40% 59.7%
21% 27% 25% 27% 100% 432 76% 51.1% 58 287% 6.9% 374 63% 44.3% 413 14% 48.9%
21% 27% 26% 27% 100% 488 69% 13% 54.2% 83 277% 43% 9.2% 405 52% 8% 45.0% 413 5% 0% 45.8%
20% 26% 26% 28% 100% 548 69% 12% 57.2% 117 290% 41% 12.2% 431 46% 6% 45.0% 410 -1% -1% 42.8%
20% 25% 27% 28% 100% 609 62% 11% 60.0% 152 281% 30% 15.0% 457 36% 6% 45.0% 406 -4% -1% 40.0%
19% 25% 27% 29% 100% 667 55% 10% 62.5% 189 226% 24% 17.7% 478 28% 5% 44.8% 400 -3% -1% 37.5%
19% 25% 27% 29% 100% 667 55% 62.5% 189 226% 17.7% 478 28% 44.8% 400 -3% 37.5%
18% 23% 29% 30% 100% 915 37% 71.5% 343 81% 26.8% 572 20% 44.7% 365 -9% 28.5%
17% 22% 30% 31% 100% 1,146 25% 77.0% 491 43% 33.0% 655 14% 44.0% 342 -6% 23.0%
99 107 64 57 327
126 143 105 109 483
129 152 119 126 526
136 159 132 139 565
143 169 141 152 604
149 180 153 164 646
149 180 153 164 646
171 216 209 232 828
191 251 263 297 1,002
64.3% 58.5% 46.4% 42.9% 53.8%
70.4% 62.4% 49.5% 48.4% 57.2%
68.6% 63.1% 51.7% 52.1% 58.4%
69.8% 63.5% 52.9% 52.5% 59.0%
71.1% 65.8% 52.2% 52.8% 59.5%
72.2% 67.8% 52.8% 53.4% 60.5%
72.2% 67.8% 52.8% 53.4% 60.5%
74.2% 72.7% 57.0% 60.2% 64.7%
75.2% 76.6% 59.5% 64.0% 67.3%
55% 70% 121% 97% 77%
27% 34% 64% 91% 48%
23% 27% 65% 68% 41%
16% 25% 55% 58% 36%
15% 25% 44% 52% 32%
18% 26% 46% 50% 34%
18% 26% 46% 50% 34%
15% 20% 36% 42% 28%
12% 16% 26% 28% 21%
30% 33% 20% 17% 100%
26% 30% 22% 23% 100%
25% 29% 23% 24% 100%
24% 28% 23% 25% 100%
24% 28% 23% 25% 100%
23% 28% 24% 25% 100%
23% 28% 24% 25% 100%
21% 26% 25% 28% 100%
19% 25% 26% 30% 100%
52
Figure 48: Facebook Revenue DriversAdvertising

$ in millions
2010A Global Summary Global Advertising Advertising Impressions Y/Y Growth Q/Q Growth Average Cost Per Thousand (CPM) Y/Y Growth Q/Q Growth Global Advertising Revenue Y/Y Growth Q/Q Growth Regional Breakdown US & Canada Advertising Impressions Y/Y Growth Q/Q Growth Average Cost Per Thousand (CPM) Y/Y Growth Q/Q Growth US & Canada Advertising Revenue Y/Y Growth % of Total Advertising Revenue Europe Advertising Impressions Y/Y Growth Q/Q Growth Average Cost Per Thousand (CPM) Y/Y Growth Q/Q Growth Europe Advertising Revenue Y/Y Growth % of Total Advertising Revenue Asia Advertising Impressions Y/Y Growth Q/Q Growth Average Cost Per Thousand (CPM) Y/Y Growth Q/Q Growth Asia Advertising Revenue Y/Y Growth % of Total Advertising Revenue Rest of World Advertising Impressions Y/Y Growth Q/Q Growth Average Cost Per Thousand (CPM) Y/Y Growth Q/Q Growth ROW Advertising Revenue Y/Y Growth % of Total Advertising Revenue 25 1% 143 8% 555 30% 1,071 57% 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
11,000
15,500 41%
4,600 35% 5% $0.19 1% -12% 872 37% -8%
4,610 17% 0% $0.19 -2% 2% 890 15% 2%
4,844 22% 5% $0.20 -2% 2% 957 20% 7%
5,461 25% 13% $0.22 1% 10% 1,185 26% 24%
19,615 27%
23,755 21%
28,446 20%
$0.17
$0.20 20%
$0.20 0%
$0.21 8%
$0.23 9%
1,868
3,154 69%
3,904 24%
5,104 31%
6,670 31%
4,455
1,200 8% 4% $0.35 16% -13% 419 26% 48%
1,182 5% -1% $0.36 3% 3% 426 8% 48%
1,164 9% -2% $0.36 -3% 0% 418 6% 44%
1,275 10% 10% $0.39 -3% 8% 493 7% 42%
4,821 8%
5,295 10%
5,836 10%
$0.36
$0.36 3%
$0.39 6%
$0.40 5%
1,583 48% 50%
1,755 11% 45%
2,042 16% 40%
2,363 16% 35%
5,549
1,800 40% 12% $0.15 -5% -20% 274 33% 31%
1,524 12% -15% $0.16 -11% 6% 246 0% 28%
1,483 15% -3% $0.17 -10% 6% 254 3% 27%
1,900 18% 28% $0.19 1% 12% 363 19% 31%
6,708 21%
7,962 19%
9,355 18%
$0.18
$0.17 -6%
$0.18 8%
$0.20 10%
1,002 81% 32%
1,136 13% 29%
1,452 28% 28%
1,883 30% 28%
2,646
700 38% -4% $0.14 29% 9% 99 77% 11%
841 25% 20% $0.15 33% 3% 123 66% 14%
990 35% 18% $0.16 30% 7% 154 76% 16%
1,023 40% 3% $0.17 32% 10% 176 85% 15%
3,554 34%
4,549 28%
5,640 24%
$0.12
$0.16 32%
$0.18 16%
$0.21 14%
313 119% 10%
552 76% 14%
820 49% 16%
1,160 41% 17%
3,089
1,000 86% 13% $0.08 0% -11% 80 86% 9%
1,063 35% 6% $0.09 13% 13% 96 52% 11%
1,208 38% 14% $0.11 36% 20% 131 87% 14%
1,262 42% 5% $0.12 35% 12% 153 92% 13%
4,533 47%
5,949 31%
7,615 28%
$0.08
$0.10 23%
$0.13 31%
$0.17 25%
256 934% 8%
460 80% 12%
790 72% 15%
1,264 60% 19%
53
Figure 49: Facebook Revenue DriversPayments

$ in millions
2010A Payment and Other Fees Global Payments and Other Fees Total Payments and Other Fees Y/Y Growth Q/Q Growth Revenue per Avg. DAU Y/Y Growth Q/Q Growth Revenue Per Avg. MAU (ARPU) Y/Y Growth Q/Q Growth Regional Breakdown US & Canada Payment and Other Fees Revenue Y/Y Growth % of Total Payment Revenue Revenue per Avg. DAU Y/Y Growth Q/Q Growth Revenue per Avg. MAU (ARPU) Y/Y Growth Q/Q Growth Europe Payment and Other Fees Revenue Y/Y Growth % of Total Payment Revenue Revenue per Avg. DAU Y/Y Growth Q/Q Growth Revenue per Avg. MAU (ARPU) Y/Y Growth Q/Q Growth Asia Payment and Other Fees Revenue Y/Y Growth % of Total Payment Revenue Revenue per Avg. DAU Y/Y Growth Q/Q Growth Revenue per Avg. MAU (ARPU) Y/Y Growth Q/Q Growth Rest of World Payment and Other Fees Revenue Y/Y Growth % of Total Payment Revenue Revenue per Avg. DAU Y/Y Growth Q/Q Growth Revenue per Avg. MAU (ARPU) Y/Y Growth Q/Q Growth 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
106
557 425% 0.96 $1.38 232%
186 98% -1% $0.37 37% -8% $0.21 46% -7%
215 81% 16% $0.39 31% 7% $0.23 38% 9%
244 56% 13% $0.42 17% 6% $0.25 22% 7%
284 51% 16% $0.45 13% 9% $0.27 19% 10%
928 67%
1,409 52%
2,007 42%
$0.41
$1.64 20%
$1.91 16%
$2.19 15%
$0.22
$0.77 250%
$0.97 27%
$1.20 24%
$1.45 21%
75 71% $0.92
331 340% 59% $2.94 219%
106 71% 57% $0.83 37% -1% $0.58 48% -2%
123 59% 57% $0.93 33% -69% $0.64 38% -68%
139 59% 57% $1.00 38% 20% $0.70 39% 22%
159 51% 56% $1.09 30% 18% $0.78 32% 22%
526 59% 57% $3.83 30%
803 53% 57% $5.02 31%
1,104 37% 55% $6.09 21%
$0.57
$1.99 251%
$2.73 37%
$3.68 35%
$4.55 24%
22 21% $0.26
153 587% 28% $1.23 367%
54 135% 29% $0.37 81% -7% $0.23 92% -6%
62 108% 29% $0.40 65% -67% $0.25 75% -66%
71 56% 29% $0.43 25% 18% $0.28 34% 21%
82 49% 29% $0.47 19% 17% $0.32 29% 24%
269 76% 29% $1.67 36%
409 52% 29% $2.06 24%
592 45% 30% $2.54 23%
$0.15
$0.74 400%
$1.09 46%
$1.45 33%
$2.05 41%
6 5% $0.12
50 813% 9% $0.59 402%
19 217% 10% $0.17 92% -14% $0.09 111% -12%
21 169% 10% $0.17 68% -71% $0.09 85% -69%
24 50% 10% $0.18 1% 5% $0.09 7% 9%
28 42% 10% $0.19 -2% 12% $0.10 3% 13%
93 86% 10% $0.72 21%
141 51% 10% $0.78 8%
221 57% 11% $0.94 20%
$0.06
$0.29 422%
$0.37 29%
$0.43 16%
$0.55 27%
3 3% $0.07
22 672% 4% $0.27 300%
7 133% 4% $0.06 31% -22% $0.03 46% -19%
9 115% 4% $0.06 32% -76% $0.03 46% -73%
10 32% 4% $0.07 -15% 12% $0.04 -7% 18%
14 77% 5% $0.09 17% 39% $0.05 29% 41%
40 76% 4% $0.29 7%
56 43% 4% $0.28 -2%
90 60% 5% $0.34 20%
$0.03
$0.13 336%
$0.15 19%
$0.16 9%
$0.21 30%
54
Figure 50: Facebook Balance Sheet

$ in millions
2010A Assets Cash and cash equivalents Marketable securities Accounts receivable Prepaid expenses and other current assets Total Current Assets Property and equipment Goodwill and intangible assets, net Other assets Total Assets Liabilities and Stockholder's Equity Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Current portion of capital lease obligations Total Current Liabilities Capital lease obligations, less current portion LT Debt Other liabilities Total Liabilities Stockholders Equity Convertible preferred stock Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total Stockholder's Equity Total Liabilities and Stockholder's Equity Balance Check Total Gross Cash Total revenue Cost of Revenue Accounts receivable, net of allowance A/R DSOs % of Revenue Prepaid expenses and other current assets % of Revenue Accounts payable A/P DSPs % of Revenue Platform partners payable % of Revenue Deferred revenue and deposits % of Revenue Current portion of capital lease obligations % of Revenue
PF 2011A PF 1Q12A 1,512 2,396 547 478 4,933 1,475 162 90 6,660 1,282 2,628 482 627 5,019 1,855 189 121 7,184
2Q12E 7,838 2,628 486 553 11,506 2,093 739 121 14,458
3Q12E 7,962 2,628 498 600 11,688 2,312 739 121 14,860
4Q12E 8,452 2,628 609 441 12,130 2,566 739 121 15,555
4Q13E 11,231 2,628 767 434 15,059 3,460 739 121 19,379
2014E 14,575 2,628 920 434 18,557 4,274 739 121 23,690
1,785 373 88 2,246 574 96 74 2,990
29 75 137 42 106 389 117 250 72 828
63 171 296 90 279 899 398 135 1,432
129 178 337 93 302 1,039 404 144 1,587
111 177 337 99 265 989 404 144 1,537
156 204 337 108 264 1,069 404 144 1,617
73 235 337 117 272 1,034 404 144 1,582
153 334 337 133 287 1,244 404 144 1,792
217 434 337 174 304 1,465 404 144 2,013
615 947 (6) 606 2,162 2,990 OK 1,785 1,974 493 373 17 19% 88 4% 29 1 1% 75 4% 42 2% 106 5%
4,267 (6) 967 5,228 6,660 OK 3,908 3,711 851 547 13 15% 478 13% 63 2 2% 171 5% 90 2% 279 8%
4,433 (7) 1,171 5,597 7,184 OK 3,910 1,058 273 482 42 46% 627 59% 129 11 12% 178 17% 93 9% 302 29%
6,871 5,499 (7) 558 12,921 14,458 OK 10,466 1,105 292 486 40 44% 553 50% 111 9 10% 177 16% 99 9% 265 24%
6,685 5,837 (7) 727 13,243 14,860 OK 10,590 1,200 308 498 38 42% 600 50% 156 12 13% 204 17% 108 9% 264 22%
6,792 6,238 (7) 950 13,973 15,555 OK 11,080 1,468 377 609 38 42% 441 30% 73 5 5% 235 16% 117 8% 272 19%
6,631 8,841 (7) 2,123 17,587 19,379 OK 13,859 1,970 502 767 36 39% 434 22% 153 7 8% 334 17% 133 7% 287 15%
7,803 9,845 (7) 4,037 21,677 23,690 OK 17,203 8,677 2,152 920 10 11% 434 5% 217 2 3% 434 5% 174 2% 304 4%
55
Figure 51: Facebook Cash Flow Statement

$ in millions
Net Income Depreciation and Amortization Loss on write-off of equipment Share-based compensation Tax benefit from share-based award activity Excesss tax benefit from share-based award activity Accounts Receivable Prepaid expenses and other current assets Other assets Accounts Payable Platform partners payable Accrued expenses and other current liabilities Deferred Revenue and deposits Other liabilities Change in Working Capital Net Cash from Operating Activities Purchases of property and equipment Purchases of marketable securities Maturities of marketable securities Sales of marketable securities Investments in non-marketable equity securities Acquisitions of business, net of cash acquired Change in restricted cash and deposits Net Cash used in Investing Activities Net proceeds from inssuance of convertible preferred stock Net proceeds from issuance of common stock Proceeds from exercise of stock options Proceeds from (repayments of) LT Debt Proceeds from sale and lease-back transactions Principle payments on capital lease obligations Excess tax benefit from share-based award activity Net Cash provided by Financing Activities Effect of FX Net Increase/Decrease in Cash and Cash Equivalents Cash at BOP Cash at EOP Fair Value of shares issued related to acquisitions of biz and other Capex Y/Y Growth % of Revenue Property and equipment acquired under capital leases Y/Y Growth % of Revenue Capex + Capital Lease PPE Y/Y Growth % of Revenue Depreciation and Amortization D&A Depreciation as % of Revenue Depreciation as % of Avg Period PPE Property Plant and Equipment PPE, BOP + Capital Expenditures (Incl. PPE Under Cap Lease) - Depreciation Net PPE, EOP Reported Net PPE, EOP FCF Calculation Net Cash from Operating Activities Less: Capex Less: Property and equipment acquired under capital leases Free Cash Flow Y/Y Growth Free Cash Flow Excluding Tax Benefit Y/Y Growth 2010A 606 139 3 20 115 (115) (209) (38) 17 12 75 20 37 16 (70) 698 (293) (22) (9) (324) 500 6 250 (90) 115 781 (3) 1,152 633 1,785 60 (293) 788% 15% (217) 288% 11% (510) 473% 26% 2011A 1,000 323 4 217 433 (433) (174) (31) (32) 6 96 38 49 53 5 1,549 (606) (3,025) 516 113 (3) (24) 6 (3,023) 998 28 (250) 170 (181) 433 1,198 3 (273) 1,785 1,512 58 (606) 107% 16% (473) 118% 13% (1,079) 112% 29% 1Q12A 205 110 1 103 54 (54) 65 (28) (32) (3) 7 2 3 8 22 441 (453) (876) 567 69 (1) (25) (1) (720) 5 62 (71) 54 50 (1) (230) 1,512 1,282 6 (453) 43% (38) 4% (491) 46% (276) 25% (111) 10% (387) 35% (264) 22% (132) 11% (396) 33% (338) 23% (117) 8% (455) 31% (1,331) 120% 28% (398) -16% 8% (1,729) 60% 36% (1,368) 3% 21% (423) 6% 7% (1,791) 4% 28% (1,475) 8% 17% (460) 9% 5% (1,935) 8% 22% 2Q12E (613) 149 1,000 62 (4) 74 (18) (1) 6 (37) 20 618 (276) 3Q12E 169 177 210 110 (12) (47) 45 27 9 (1) 21 687 (264) 4Q12E 222 201 257 133 (111) 160 (83) 31 9 8 14 828 (338) 2012E (16) 637 1 1,570 54 251 (62) 158 (32) (59) 64 2 27 (22) 77 2,574 (1,331) (876) 567 69 (1) (875) (1) (2,448) 6,765 5 62 (71) 54 6,815 (1) 6,940 1,512 8,452 2013E 1,173 898 780 737 (158) 7 80 99 16 15 59 3,647 (1,368) (1,368) 2014E 1,914 1,121 677 1,039 (153) (0) 64 100 40 17 68 4,820 (1,475)
(550) (826)
(300) (564) (338)
(1,475)
6,765
6,765
500 500
6,556 1,282 7,838
123 7,838 7,962
490 7,962 8,452
2,779 8,452 11,231
3,344 11,231 14,575
139 7% 42%
323 9% 34%
110 10% 7%
149 13% 8%
177 15% 8%
201 14% 8%
637 13% 32%
898 14% 30%
1,121 13% 29%
148 510 (139) 519 574
574 1,079 (323) 1,330 1,475
1,475 491 (110) 1,856 1,855
1,855 387 (149) 2,093
2,093 396 (177) 2,312
2,312 455 (201) 2,566
1,475 1,729 (637) 2,567
2,567 1,791 (898) 3,460
3,460 1,935 (1,121) 4,274
698 (293) (217) 188 185% 188 185%
1,549 (606) (473) 470 150% 470 150%
441 (453) (38) (50) (50)
618 (276) (111) 231 170
687 (264) (132) 291 181
828 (338) (117) 373 239
2,574 (1,331) (398) 845 80% 540 15%
3,647 (1,368) (423) 1,856 120% 1,118 107%
4,820 (1,475) (460) 2,885 55% 1,845 65%
56
Facebook: Summary of Financials

Income Statement - Annual Revenues Operating Income D&A EBITDA Net interest income / (expense) Other income / (expense) Pretax income Income taxes Net income Weighted average diluted shares Diluted EPS Balance Sheet and Cash Flow Data Cash and cash equivalents Accounts receivable Other current assets Current assets PP&E Total assets Total debt Total liabilities Shareholders' equity Net Income (including charges) D&A Change in working capital Other Cash flow from operations Capex Free cash flow Cash flow from investing activities Cash flow from financing activities Dividends Dividend yield FY11A 3,711 1,973 323 2,296 (42) (19) 1,695 695 1,000 2,332 0.51 FY11A 1,512 547 2,874 4,933 1,475 6,660 0 1,432 5,228 1,000 323 5 1,549 (606) 470 (3,023) 1,198 FY12E 4,832 1,998 637 2,635 500 516 (16) 2,500 0.50 FY12E 8,452 609 3,069 12,130 2,566 15,555 0 1,582 13,973 (16) 637 77 2,574 (1,331) 845 (2,448) 6,815 FY13E 6,513 2,774 898 3,672 2,094 921 1,173 2,675 0.66 FY13E 11,231 767 3,062 15,059 3,460 19,379 0 1,792 17,587 1,173 898 59 3,647 (1,368) 1,856 (1,368) 500 FY14E 8,677 3,852 1,121 4,974 3,300 1,386 1,914 2,729 0.92 FY14E 14,575 920 3,062 18,557 4,274 23,690 0 2,013 21,677 Income Statement - Quarterly Revenues Operating Income D&A EBITDA Net interest income / (expense) Other income / (expense) Pretax income Income taxes Net income Weighted average diluted shares Diluted EPS Ratio Analysis Sales growth EBITDA growth EPS growth EBITDA margin Net margin Debt / EBITDA Return on assets (ROA) Return on equity (ROE) 1Q12A 1,058A 484A 110A 594A 382A 177A 205A 2,361A 0.12A FY11A 88.0% 92.8% 61.9% 65.4 2Q12E 1,105 438 149 587 (544) 68 (613) 2,451 0.11 FY12E 30.2% 14.8% (1.7%) 54.5% 66.5 3Q12E 1,200 475 177 652 292 122 169 2,554 0.12 FY13E 34.8% 39.4% 31.7% 56.4% 50.5 4Q12E 1,468 601 201 802 371 148 222 2,634 0.14 FY14E 33.2% 35.4% 40.1% 57.3% 36.0
1,914 1,121 Enterprise value / EBITDA 68 Enterprise value / Free cash flow P/E 4,820 (1,475) 2,885 (1,475) 0 -

Note: $ in millions (except per-share data).Fiscal year ends Dec
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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Market Maker: JPMS makes a market in the stock of Facebook.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Facebook within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Facebook. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Facebook. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Facebook. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Facebook. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Facebook. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Facebook. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Facebook. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing research.disclosure.inquiries@jpmorgan.com with your request.
Facebook (FB, FB US) Price Chart
60
50
40 Price($) 30
20
10
0 May 12 May 12 May 12 Jun 12 Jun 12 Jun 12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
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average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Anmuth, Doug: Amazon.com (AMZN), Bankrate Inc (RATE), CafePress, Inc. (PRSS), Expedia, Inc. (EXPE), Google (GOOG), Groupon (GRPN), HomeAway Inc (AWAY), LinkedIn Corp (LNKD), Netflix Inc (NFLX), Pandora Media Inc (P), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), TripAdvisor, Inc. (TRIP), Yahoo Inc (YHOO), Zynga Inc (ZNGA), eBay, Inc (EBAY) J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 45% 51% 43% 70% Neutral (hold) 43% 45% 48% 61% Underweight (sell) 12% 34% 9% 53%
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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North America Equity Research

Internet Doug Anmuth

(1-212) 622-6571 douglas.anmuth@jpmorgan.com

Kaizad Gotla, CFA

FB share price ($) S&P500 (rebased)

YTD -13.0% -16.8%

12m -13.0% -16.0%

2011A 0.10 0.12 0.12 0.16 0.51 -

2012E 0.12A 0.11 0.12 0.14 0.50 0.52

2013E 0.14 0.15 0.16 0.20 0.66 0.66

2014E 0.92 0.87

Source: Company data, Bloomberg, J.P. Morgan estimates.

33.10 26 Jun 12 45.00 - 25.52 86,821.30 Dec 2,623 45.00 31 Dec 13

See page 58 for analyst certification and important disclosures.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Social Infrastructure Creates Options ..................................23 Large Global Market Opportunity..........................................27

Culture and Management.......................................................31 Key Facebook Products and Features .................................32

Financial Outlook ...................................................................43

Valuation .................................................................................47 Financial Models.....................................................................50

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Risks to Rating and Price Target

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Figure 1: Facebook Revenue per User Compared to Other Internet Companies

Revenue / User 2011

$0.0 GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren

14.4% 5.0% Facebook

9.0% 10.4% 3.1%

Google % Share of time spent

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

2012E $11.86 $5.68 $2.57 $1.88 $5.05

2013E $13.04 $6.61 $2.93 $2.45 $5.55

2014E $14.29 $8.08 $3.42 $3.19 $6.27

33% 46% 40% 468% 25%

3% 1% 24% 21% -1%

10% 16% 14% 30% 10%

10% 22% 17% 30% 13%

Source: Company reports and J.P. Morgan estimates.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Very Not at all effective , effective, 13% 12%

Not very effective , 28%

Somewhat effective, 47%

Source: Chief Marketer, 2011 Social Marketing Survey.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Figure 5: Facebook Sponsored Story Ad Performance

1.140% 0.588% $9.86 $3.72 Mobile News Feed

$12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00

Source: TBG Digital and TechCrunch.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 27 June 2012

Profile Pages, 12%

Homepage/ Newsfeed, 40%

Apps/Tools, 14% Photos, 18%