FACEBOOK INC.Financial Analysis

Full version: https://www.facebook.com/zuck/posts/10101250930776491

INDUSTRY ANALYSIS

MINI GAME: Count the total apps on your smart phone.

DUPONT ANALYSIS

Key Ratio Analysis 2013 2012 2011

ROE (Return on Equity) 10.95% 0.31%  

Return on Asset 8.33% 0.17% 10.85% 

ROFL 2.62% 0.15%  

Profit Margin 35.70% 10.57% 47.32%

Asset Turnover 0.48 0.47  1.17

Times Interest Earned 50.18 10.55 41.81

Solvency Ratio 112% 1% 53%

Debt-to-Equity 16% 28% 33%

Net Working Capital $  11,970,000.00  $10,215,000  $3,705,000 

Current Ratio 11.88 10.71 5.12

Quick Ratio 11.46 10.26 4.96

COMPETITORS

Key Ratio Analysis in 2013FB GOOGL MSFT YHOO

ROE (Return on Equity) 10.95% 16.20% 30.10% 10%

Return on Asset 8.33% 12.60% 16.60% 7.77%

ROFL 2.62% 3.60% 13.50% 2.23%

Profit Margin 35.70% 20.40% 34.70% 29.19%

Asset Turnover 0.48 0.62 0.48 0.27

Times Interest Earned 50.18 160.36 78.44 45.23

Solvency Ratio 112% 58.50% 43.71% 54.75%

Debt-to-Equity 16% 27% 80.42% 14.10%

Net Working Capital $  11,970,000.00   $  56,798,000.00   $ 64,049,000.00   $        36,850.00 

Current Ratio 11.88 4.63 2.71 11.4

Quick Ratio 11.46 4.3 2.66 11.4

STOCK RATIO ANALYSISStock Ratio Analysis (April 24, 2014) FB GOOGL MSFT YHOO

Market Cap156.9 179.9 330.5 35.6

Stock Price per Share (200 days MA)60.87 549.43 39.86 35.24

EPS (Earning per Share) (TTM) 0.79 18.41 2.71 1.21

P/E Ratio78.01 29.19 14.66 29.19

P/B (Price-to-Book ratio)10.07 3.95 3.87 2.83

Price/ Sales19.87 5.82 3.95 7.82

PEG Ratio (5 year expected) 1.55 1.27 1.55 2.69

Outstanding Shares 2.55 0.67446 8.3 1.03

Operating Cash Flow 4.22 19.42 28.19 1.12

Beta 1.77 1.1 0.69 1.13

P/CF36.78 19.08 11.74 32.41

EQUITY VALUATION

DDM or CAPM valuation No Dividend No DDM CAPM: RFB = rf + bFB * (rM – rf) = 2.67 + 1.77 * (7.32 –

2.67) = 10.90%

*We will use the yield on 10-year US Treasury bonds, because it’s very unlikely to default. As of the time this paper is written, the risk-free rate is 2.67% (United States Government Bonds, 2014). We will use 10 year average of S&P 500 Index as expected market return, which has the value of 7.32% as of today (S&P 500 Index, 2014)

ROI: 8.33% Overvalued

WEIGHTED AVERAGE COST OF CAPITAL

Cost of debt Cost of debt (before tax) is usually the corporate bond rate of

company’s bond rating. Since Facebook currently has no bond, we will assume that Facebook will receive an “A” bond rating from Standard and Poors or Moody. Cost of debt = Risk-free rate + Credit Spread = 2.67 + 0.52 = 3.19 (Credit spread using data from (Composite Bond Yields Table, 2014))

Current tax rate: I will use data from Facebook’s income statement in 2013Tax rate = Taxes / Earning before Taxes = $1,254,000 / $2,754,000 = 48.71%

Cost of debt (after tax) = cost of debt (before tax) * (1 – Tax rate) = 3.19 * (1- 48.71)= 1.64% Cost of equity: we already calculate this in part III.5 as 10.90% Weighted cost of capital. We use data from Facebook’s balance sheet

in 2013. Debt percentage: $2,425,000 / $17,895,000 = 0.1355 Equity percentage: $15,470,000 / $17,895,000 = 0.8645 Weighted cost of capital = 0.1355 * 1.64% + 0.8645 * 10.90%

= 0.22% + 9.42% = 9.64%

ACQUISITIONS

Source: http://techcrunch.com/2014/02/25/the-age-of-acquisitions/

HISTORICAL PRICE CHART

PRICE-EARNINGS RATIO FORECAST FOR FB STOCK

Source: Nasdaq

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