FB Buy $130 Target Price Analysis

FB has a strong bull case for investment, focusing on its massive social network, high user engagement, mobile success, and various growth opportunities. Risks exist but are overshadowed by growth potential and market dominance. The analysis also highlights future growth phases and revenue opportunities. Overall, FB appears well-positioned for continued success in the digital landscape

• - Social Network
• Mobile Success
• Growth Opportunities
• Market Dominance
• Investment Analysis

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1. FB, BUY, $130 Target Price April 18, 2016 Mike Swierczek, CFA mswierczek@gmail.com

2. FB: The Bull Case Scale, Use and Growth of Core Social Network Massive social network, network effects with billions of users create high barriers and very wide, defensible moat Very large economies of scale create high margins Intensity of use remains very high (~80% US) , eyeball share growing: minutes/user +22% y/y. Built for the mobile world and has successfully navigated mobile transition (80% of ad rev) Future Opportunities Stemming From The Core User data, analytics, measurement (FB pixel, Conversion Lift) lead to improved quality and relevance in ads. FB Audience Network (3rd party sites) now $1b run rate Better monetize supplemental products: Instagram: 400m MAU, recently added Trending Content, content editing apps Messenger: 800m MAU, M AI, payments WhatsApp: 1b MAU, now free Virtual reality option: Oculus the leader in VR, future platform opportunity Monetization/minute spent by users still well below comps Prevalence of improving ad blockers further increase value of contained ecosystem Online video offers huge potential, now at 100m hours daily. Slideshow: video ads at low connection speeds 1

3. Risk Exists, But Trumped By Opportunities Contrarians Argue Counter Argument Are young people shifting more to other sites? Some risk here, but little evidence that this has effected growth, scale, or usage. May also become users as lifestyle changes with age. Instagram skews younger. Law of Large Numbers will catch up to it (1.6 b MAU) True, it will eventually catch-up to it, but still growing users +14% y/y and reaccelerated in 2H15, faster than most peers. FB has faced this for years, still growing. Regulatory/privacy risk Some risk here, but nothing appears imminent that would drastically impact business Advertising effectiveness uncertain Risk has significantly diminished in recent quarters, with introduction of FAN, better analytics, new products, etc Huge portion of NPV FCF calculation is tied to terminal value assumptions Very profitable high growth companies inescapably tied to growth assumptions, but appears to have a long, clear road ahead of it with a very wide moat. 2

4. Much More Growth To Come Phase III: New Platform Opportunities - Virtual Reality: Oculus top of my VR Leaderboard - Deepen Instagram (400m MAU), WhatsApp integration - Exploit walled garden of search - Substantial online video opportunity (100m hours watched daily now) Phase II: Monetize Users - Domestic Market now >$40 ARPU 4QT, growing 50% y/y - Substantial International opportunity: $7 ARPU, +25% y/y - Revenue/user minute still well below comps, lots of room to rise - Treasure trove of user data, 3rd party advertising (FAN) - 2.5m active advertisers, >50m small business pages FB is only about here Phase I: Add Users - 1.6 billion global MAU - Global MAU still growing +14% y/y - Near 60% share of smartphone installed base - Slowing device markets as market saturates creates headwind - Very strong intensity of use still rising: ~80% domestic, 2/3 global DAU/MAU 3 Illustrative, not drawn to scale

5. Stage I: Nearing an End. Device, FB Penetration High The market is becoming saturated as the world is running out of people without a smartphone, tablet or PC that can afford one, and FB s penetration is nearing saturation among those users. Extremely High Mobile Penetration Has Stabilized FB Mobile Users as a Share of Estimated Global Smartphone Installed Base User Growth Continues, Some Reacceleration Monthly Active Users (MAU) 4 Source: FB, IDC, Gartner, my estimates

6. But Intensity Mitigates, Leading to Stage II Growth Near-term growth drivers: - Ad supply (users, more spaces, minutes) and demand (2.5m small businesses) are growing. Price/ad up 21% y/y in 4Q, impressions +29% y/y - Aggressive, constantly introducing new ad products - Shopping/ buy buttons - Instagram ads increasing - Oculus launch - Analytics/brand measurement, Brand Awareness Optimization Ample opportunity remains within FB s users to drive more revenue. Intensity of use continues to rise, with nearly 80% of domestic monthly users active daily, and nearly 2/3 internationally. FB faces more competition in international markets, but should be able to continue to grow user activity. Intensity Increases Are Slowing, But Still Grows Higher DAU/MAU 5 Source: FB

7. Stage II: Monetization Improves, ARPU Accelerates Monetization is improving as FB continues to introduce new and better ad products, analytics, and even moves to third-party ads (FAN) Improvements have led to a reacceleration in ARPU in recent quarters. ARPU is now growing 50% y/y domestically, and >30% globally. While the International ARPU won t equal domestic, there is opportunity to narrow the gap in out years, especially as domestic growth slows. $41 Annual Domestic ARPU Drives Growth, Int l Opportunity ARPU, 4QT ARPU Growth Reaccelerates Across Geographies Y/Y Growth in ARPU 6 Source: FB

8. Stage III: Virtual Reality as a Strong Growth Driver Virtual reality (VR) is more than just gaming, it is a platform with enormous potential for conveying and interacting with information across many large markets: Communication, Enterprise, Real Estate, Education, Health Care and many more. Gaming will be central monetization point and drive eyeball share in the early going, but presents enormous potential for social networking/communication/sharing. VR is now emerging, but enthusiasm should be tempered for 1.0 versions that fail to adequately capture VR s potential. In 2016, I forecast 9m VR units for the market, with high growth potential. While SNE s PS VR is underappreciated and has an advantage in Year 1 (installed base, gaming strength, cost), longer-term, FB s Oculus has better product, vendor tie-ins (MSFT, Samsung), declining price, and social network backing. Virtual reality can become the most social platform. - Mark Zuckerberg, FB CEO at MWC 2/21/16 Swierczek s Virtual Reality Leaderboard Leaders 1. FB (Oculus) Leading SW platform. Competitors playing catch-up. March release plagued by delays. $599 price plus ~$1000 PC too expensive. Est 1m units. Short-term hurdles: PC-cost, non-gaming co. Future Xbox-device? Tie-ins with Samsung, MSFT. Touch controller delayed as well. 2. SNE Gaming focus with strong base. Media assets. Unveiled early. 1H16 release? $399 price inline with expectations, but October release much later than previously expected. Expect >1m units. Underappreciated by Street: installed base, gaming co, cheaper all-in cost. Will lead early, but Oculus better long-term. 3. Valve/HTC Rave reviews, but likely to stay true to gaming niche. $799 price & April launch. Estimate <1m units in 16 4. GOOGL Will cast a wider net: Glass 2.0, Magic Leap investment, Android base 5. MSFT HoloLens in AR. AR may have a higher ceiling. Kinect a strong asset. Xbox #2 to SNE in console. Win 10 support helps, especially with Oculus Xbox controller and Valve. Likely very expensive initially ($3k SDK). Untethered is key. 6. Samsung Smartphone HMDs (Gear VR) are entry level, not captivating. HW-only is tough. Price drop to $99 Other Contenders AAPL Likely working on something. Can t ignore. Defend/protect ecosystem. Acquisitions: Metaio, FlyBy Media, Faceshift, expert hires Nintendo Long history in VR gaming. Should put experience to work. Waiting on NX AMZN Wants Prime ecosystem. Huge VR/AR potential in consumer retail core 7

9. FCF Valuation Analysis Yields $130 Target 2013 2014 Domestic MAU (m) 198 205 Y/Y 3% Int'l MAU (m) 972 1,130 Y/Y 16% Domestic ARPU $18.64 $28.61 Y/Y 54% Int'l ARPU $4.30 $5.84 Y/Y 36% Global MAU (m) 1,170 1,335 Global ARPU $6.73 $9.34 Social Networking Revenue $7,872 $12,466 Oculus Units (m) Oculus Price Oculus Revenue Social Network Operating Income $2,804 $4,994 Social Network Operating Margin 36% 40% Oculus Operating Income Oculus Margin 2015 2016E 2017E 2018E 2019E 2020E 215 5% 221 3% 1,485 14% $54.63 32% $8.26 20% 1,706 $14.27 $24,351 228 3% 1,678 13% $69.38 27% $9.75 18% 1,906 $16.88 $32,164 232 2% 1,896 13% $84.64 22% $11.50 18% 2,128 $19.49 $41,481 237 2% 2,086 10% $97.34 15% $13.57 18% 2,323 $22.12 $51,384 12.0 242 2% 2,294 10% $109.02 12% $16.02 18% 2,536 $24.88 $63,106 1,303 15% $41.39 45% $6.88 18% 1,517 $11.77 $17,855 1.0 2.5 6.0 20.0 $399 $7,980 $25,242 40% $599 $599 $8,766 36% $30 $549 $1,373 $12,222 38% $499 $2,994 $16,592 40% $449 $5,388 $20,553 40% $6,225 35% $38 7% $35 7% $45 10% $40 10% 5% Total Revenue Total Op Income Other Interest, Income and Taxes % Net Income + Depreciation + Changes in Operating Asset & Liabilities - CapEx Free Cash Flow $7,872 $2,804 47% $1,500 $1,011 $793 $1,362 $1,942 $12,466 $4,994 $17,855 $6,225 $24,950 $8,796 $33,537 $12,261 $44,475 $16,627 $56,772 $20,598 $71,086 $25,282 41% 41% 38% 38% 38% 38% 38% $2,940 $1,243 -$293 $1,831 $2,059 $3,688 $1,945 $784 $2,523 $3,894 $5,454 $2,529 $250 $4,250 $3,982 $7,602 $3,500 $300 $4,800 $6,602 $10,309 $4,000 $400 $5,000 $9,709 $12,771 $4,500 $500 $5,200 $12,571 $15,675 $4,700 $600 $5,600 $15,375 WACC Terminal Growth 10.0% 7.0% Terminal Value Present Value of Cash Flows Total Present Value Diluted Shares (m) $548,374 $350,044 $3,620 $5,456 $7,294 $8,586 $375,001 2878 130 $ Target Price Bull Case 8 $155 Bear Case $95