J.P.. Morgan

J.P.. Morgan Facebook Facebook Beginning to Show the True Potential of Its Ad Platform; We'd Continue to Be Buyers, PT to S44 Facebook delivered its strongest quarter yet as a public company—results that we think could be thesis-changing for many—and we would continue to buy Facebook shares even after the —17% move up in the after-market. Our revenue and non-GAAP EPS estimates increase 12% and 38% for 2013, and 22% and 46% for 2014. Our price target moves from $35 for year end 2013 to $44 for year end 2014, based on the average of our DCF analysis ($48), 15x 2015E EBITDA ($45), and 30x 2015E non- GAAP EPS ($38). We reiterate our Overweight rating. • Significant Mobile Advertising upside. Mobile revenue of $656M was well above our $446M estimate, driving 15% upside in total Ad revenue and 45% upside in both non-GAAP operating income and EPS. One year into Facebook's Mobile Advertising efforts, Mobile has increased from zero to 41% of total Ad revenue. As Mobile becomes the majority of Ad revenue in 2H13, we believe the Desktop to Mobile mix-shift bear argument should fade as Mobile benefits from secular growth and higher pricing potential. It is also where Facebook's ad platform is most differentiated. Quite simply, Mobile moves from a headwind to a tailwind. • Inflection in advertiser demand and ad quality. We believe 2Q matted an inflection point in advertiser demand and ad quality for Facebook, enabling the company to increase inventory while simultaneously realizing higher pricing. This is the first quarter we have seen such strong auction dynamics play out on Facebook's platform and we believe it can continue as advertiser ROI improves. Overall ad impressions increased 43% YA' and eCPMs 13% YN, and pricing would have been even higher if not for the lower pricing floor in int'l markets. • Greater clarity on engagement and back-half comps. We think management provided greater insight into engagement trends and tougher 2H 13 comps. Beyond DAUs/MAUs increasing to 61%, management indicated that time spent per person on Facebook continues to increase and that internal data shows steady usage and engagement among teens. Management noted tougher 2H comps, but also showed greater confidence in News Feed ads and the company's ability to improve quality and relevance. Ow 2HI3 YN advertising growth increases from 27% to 51%. • Significant increases to numbers. We now project 2013/2014 revenue of $7.3B (+44% WY) / $9.6B (+31% WY) and non-GAAP EPS of $0.74 (+38% YN) $0.98 (+32%). Ow 2015 non-GAAP EPS goes to $1.25. Facebook Inc. (FB;FB US) FYE Dec 2011A 2012A 2013E 2013E 2014E 2014E (Prey) (Curr) (Prey) (Curr) EPS - Repotted (S) O1 (Mar) 0.10 0.12 0.12A 0.12A O2 (Jun) 0.12 0.12 0.13 0.19A O3 (Sep) 0.12 0.12 0.13 0.19 04 (Dec) 0.17 0.17 0.15 0.23 FY 0.51 0.54 0.54 0.74 0.67 0.98 CONSENSUS_EPS Bloomberg EPS FY (5) - 0.51 0.58 0.76 Source: Company data. Bloomberg. J.P. Morgan estimates. North America Equity Research 25 July 2013 Overweight FB, FB US Price: $26.51 A Price Target: $44.00 Previous: $35.00 Internet Doug Anmuth AC (1. Bloomberg JPMA ANMUTH <GO> Kalzad Gotta, CFA (I Bo Nam (I Diana R Kluger (I J.P. Morgan Securities Lit Join 0012 aril Apt) Mil — PS Mon price ($) - SIP500 Owen* YTD 1m 3m 12m Me I -sax 10.6% 1.sx 4.6% Rel I -20.2% 3.6% -53% -322% Company Data Price (5) Date Of Price 52-week Range (5) Market Cap ($ run) Fiscal Year End Shares O/S (run) Price Target ($) Price Target End Date 26.51 24 Jul 13 32.51-17.55 64,976.01 Dec 2,451 44.00 31-Dec-14 See page 13 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.jpmorganmarkets.com EFTA01104713 Dou Anmuth North America Equity Research 1 25 July 2013 J.P.Morgan Key Takeaways• • Strong 2Q results. Facebook reported 2Q total revenue of $1.88 (+53% WY), 14% ahead of our forecast and 12% ahead of the Street. Ad revenue of $1.6B (+61% WY) was 15% ahead of our $1.48 (40% Y/Y) estimate. Upside to ad revenue was driven by greater than expected mobile ad revenue, an increase in the number of marketers to over I M active advertisers in 2Q, and strong performance of News Feed ads. Payments and Other revenue of $214M (+I I% YAP) also came in 4% above our $205M (+7% VA') estimate as revenue from games was up 11% VA' when adjusted for revenue recognition timing in 2012. EBITDA and PF EPS of $1.08 and $0.19 also beat our/consensus estimates of $783M/$848 and $0.13/$0.13. • Solid user engagement trends. Engagement trends across platforms remain strong, users continue to grow in all geographies, and total DAUs/MAUs have reached 61%, with the most penetrated U.S. market at over 70%. Facebook continues to make good progress on mobile as mobile DAUs were up 60% Y/Y and reached 57% DAUs/MAUs in 2Q. Despite recent negative sentiment around teen engagement levels, Facebook indicated that it is nearly fully penetrated among U.S. teens and DAUs and MAUs have been steady over the past year and half. Beyond teens, Facebook cited comScore and Nielsen data highlighting Facebook's share of time spent in the U.S. is either steady or increasing as the market expands due to mobile. As these metrics highlight Facebook only, the inclusion of Instagram would add to the growth in engagement. • Upside to ad revenue driven by News Feed ads and mobile monetization. 2Q ad revenue of $1.68 (+61% Y/Y, +63% VA' ex-FX) came in well above our $1.48 estimate, driven by strength across all regions as Facebook captures a growing portion of budgets. News Feed ads continue to be the main driver of ad revenue growth without a meaningful drop in user satisfaction—ads on average now make up 5% of stories in the News Feed. In an analysis by Datalogix, marketers saw a median return on ad sales of 3x for non-News Feed ads vs. 5.9x for News Feed ads. Facebook noted increased spend from Direct Response marketers, mobile app developers, local businesses, and brand marketers. Facebook exceeded 1M active advertisers in the quarter and reached —18M local businesses with Facebook Pages, and 88-100M people actively used Facebook daily during primetime TV hours. Additionally, mobile ad revenue of $655.6M (41% of total ad revs) was significantly higher than our $446.1M (32% of total ad revs) estimate. • Expecting tougher 2H compares. We're encouraged by the acceleration in 2Q ad revenue and we expect continued strong ad revenue growth in 2H13, driven by continued advertiser penetration, ad quality improvements, and new ad products such as video which could potentially launch in 4Q. However, Facebook faces tougher Y/Y revenue compares in 3Q and 4Q given the introduction of News Feed ads in 2H12. Facebook noted it expects 2013 revenue growth to be somewhat slower than its 50% opex growth target for 2013 and we're modeling 50% and 36% growth in 3Q and 4Q respectively. • 2013 opex guidance maintained, though cape: guidance was reduced. Facebook maintained its 2013 opex (including COGS, excluding SBC) guidance of 50% YAP growth and we're modeling some deceleration in opex growth in 2HI3. 2Q capex of $268M was lower than expected due to efficiencies and timing and the company now expects 2013 capex of $1.68, down from $1.88. 2 EFTA01104714 Dom Anmuth North America Equity Research 1 25 July 2013 J.P.Morgan Summary of the Quarter Facebook reported 2Q revenue, EBITDA, and PF EPS of $1.81B, $1.02B, and $0.19, compared to our estimates of $1.59B, $783M, and $0.13, respectively. Figure 1: Facebook 2Q Performance v J.P. Morgan Estimates (5 in millions) JPME 2Q13 Actuals Diff (%) Advertising 1,390 1599 15.0% Payments and Other Fees 205 214 4.2% Revenue 1,596 1,813 13.6% EBITDA 783 1,024 30.8% EBITDA Margin 49.1% 56.5% GAAP EPS $0.08 $0.13 56.0't€ PF EPS $0.13 $0.19 49.7% YN Growth Advertising 40.1% 61.2% Payments and Other Fees 7.0% 11.5% Revenue 34.8% 53.1% EBITDA 19.7% 56.6% GAAP EPS NM NM PF EPS 8.2% 62.0% Sequential Growth Advertising 11.7% 28.4% Payments and Other Fees -3.6% 0.5% Revenue 9.4% 24.3% EBITDA -2.6% 27.4% GAAP EPS NM NM PF EPS 4.3% 56.1% Source: J.P. Morgan estimates. Company date. EFTA01104715 Doug Anmuth North America Equity Research 1 25July 2013 J.P.Morgan Adjusting Estimates Facebook reported higher than expected mobile ad revenues and payments revenues, which offset lower than expected desktop ad revenues. As a result, we are adjusting our estimates as follows: Figure 2: Adiustino J.P. Morgan Estimates Facebook (S In moan) 3Q13 JPME Old New 4013 JPME Old New 2013 JPME Old New 2014 JPME Old New Advertising Revenue 1,425 1.693 1.647 1.952 5.708 6.489 7.088 8,830 YN Growth 31.2% 55.9% 24.0% 46.9% 33.4% 51.6% 24.2% 36.1% % ehg vs. old 18.8% 18.5% 13.7% 24.6% Mobile Revenue 505 804 623 996 1,947 2.829 3.412 5,092 Y/Y Growth 231.9% 429.1% 103.8% 225.7% 314.7% 502.5% 75.2% 80.0% % chg vs. old 59.4% 59.8% 45.3% 49.2% Desktop Total Rev 921 888 1,024 957 3.761 3.660 3.676 3,738 Y/Y Growth -1.4% -4.9% 0.1% -6.5% -1.3% -3.9% -2.2% 2.1% % dig vs. old -3.5% -8.6% -2.7% 1.7% Desktop Right Rail Rev 690 628 707 646 2.817 2.666 2.416 2,289 Y/Y Growth -19.5% -26.8% -17.2% -24.3% -20.3% -24.6% 14.3% -14.2% % chg vs. old -9.1% -8.6% -5.4% -5.2% Desktop News Feed Rev 230 261 318 311 943 994 1.261 1,450 Y/Y Growth 201.7% 241.7% 86.8% 82.7% 242.5% 260.9% 33.7% 45.9% % chg vs. old 13.3% -2.2% 5.4% 15.0% Payments Revenue 203 203 201 201 822 831 779 788 Y/Y Growth 15.3% 15.3% -21.4% -21.4% 1.5% 26% -5.2% -5.2% % ehg vs. old 0.0% 0.0% 1.1% 1.1% Total Revenue 1,628 1,896 1.849 2.153 6.530 7.320 7.868 9,618 Y/Y Growth 29.0% 50.2% 16.6% 35.9% 28.3% 43.8% 20.5% 31.4% % ehg vs. old 16.4% 16.5% 12.1% 22.2% EBITDA 781 1,045 915 1,182 3.283 4.055 3.841 5,102 Y/Y Growth 7/.4% 49.1% -4.7% 23.1% 12.9% 39.4% 17.0% 25.8% Margin (%) 18.0% 55.1% 49.5% 54.9% 50.3% 55.4% 48.8% 53.0% % dig vs. old 33.8% 29.2% 23.5% 32.8% PF EPS SO 13 $0.19 $0.15 $0.23 $0.54 $0.74 $0.67 $0.98 YN Growth 5.5% 58.5% -9.6% 33.9% 0.1% 38.0% 24.4% 32.2% % ehg vs. old 50.3% 48.2% 37.9% 46.4% Source: J.P. Morgan estmates. Darn:any data. 4 EFTA01104716 Dou Anmuth 1 North America Equity Research 25 July 2013 J.P.Morgan Investment Thesis, Valuation and Risks Facebook (Overweight: Price Target: S44.00) Investment Thesis We believe Facebook's virtual ownership of the social graph, strong competitive moat, and 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. Facebook's massive reach and engagement continue to drive network effects and its targeting abilities provide significant value to advertisers, though it is still early. We believe Facebook's ad platform is just beginning to shift toward mare social ads with higher-quality formats, and it will become increasingly valuable to advertisers. Valuation Raising PT to $44. We are establishing a 2014 year end price target of $44, which replaces ow prior 2013 year end price target of $35. Our new PT employs an average of a DCF and multiples (EV/EBITDA and PIE) based valuation. We're using this valuation approach as we believe it appropriately balances Facebook's valuation relative to its growth and industry peers, while a DCF gives the company some credit for the opportunity to improve monetization over the long term. Our DCF results in a $48 price per share and employs an 11% WACC and 3% long term growth rate. We expect Facebook to generate $26.96B in revenue in 2020 with a 53.5% EBITDA margin. Our EV/EBITDA valuation results in a $45 price per share and employs a I5x target EV/EBITDA multiple on our 2015 EBITDA of $6.39B. Our 15x target multiple is in-line with high-growth industry peers such as Netffix and TripAdvisor. Our P/E valuation results in a $38 price per share and employs a 30x PIE multiple on ow 2015 PF EPS estimate of $1.25, which is slightly below Facebook's 33% 2012- 15E PF EPS CAGR. Risks to Rating and Price Target Downside risks include: I ) user-first mentality could create short-term revenue risk and volatility; 2) competition from purpose-driven social services; 3) advertiser ROI on Facebook may remain difficult to measure; 4) privacy, security, and regulatory risks; 5) competition for online and mobile ad dollars from Google, Yahoo!, and other online advertising companies; and 6) dual-class share structure and Mark Zuckerberg's control. 5 EFTA01104717 Dou Anmuth 1 North America Equity Research 25 July 2013 IRMorgan Figure 3: Facebook Income Statement 2011A 1012A 2012A 3C112A 4012A 2012A 1013A 2Q13A 3013E 4Q13E 2013E 2014E 2015E Revenue Cost of Revenue 3,711 851 1,058 273 1,184 295 1,262 317 1,585 387 5,089 1.272 1,458 404 1,813 454 1,896 474 2,153 528 7,320 1.860 9,618 2.414 11,924 2.981 Gross Profit 2,860 785 888 045 1,198 3,817 1,054 1,359 1,422 1,626 5,461 7,204 8.043 Operatrig Expenses Marketing and Sales Research and DeMopment General and Administrative Stock-based Compensation Payroll Tax Related to SSC 383 273 225 217 6 136 93 72 103 135 112 127 1.106 152 149 142 129 179 (31) 162 157 143 184 29 582 504 471 1.572 150 175 165 151 170 20 235 186 144 224 8 252 218 152 227 286 241 166 258 949 810 612 880 1.270 1.154 789 866 1.514 1.479 954 954 Total Operating Expenses 1,104 404 1832 568 675 3.279 681 797 849 952 3.251 4,078 4.901 Operating Income 1.756 381 (743) 377 523 538 373 562 573 674 2,210 3,126 4.042 PF Operating Income 1.970 484 515 525 736 2,260 563 794 800 932 3,089 3,991 4,996 (61) 1 (22) (5) (18) (44) (20) (17) 0 21 (16) 102 162 Other income (expense)• net Pre-tax Income 1.695 382 (765) 372 505 494 353 545 573 695 2,194 3,228 4,204 Income Taxes 695 177 (608) 431 441 441 134 212 252 306 904 1,356 1.724 Effective Tax Rate 41% 46% NIA 116% 87% 89% 38% 39% 44% 44% 41% 42% 41% GAM Net Income 1.000 205 (157) (50) 64 53 219 331 321 389 1,290 1,872 2,481 GAO EPS 50.43 $0.00 ($0.08) ($0.02) $0.03 $0.02 $0.09 $0.13 $0.13 $0.15 $0.51 $0.73 $0.16 Diluted Shares Out £.332 2,361 2.451 2.579 2.506 2.474 2.499 2,502 2.511 2.515 2.507 2.557 2.608 Non-GAAP Pretax Income 1.918 485 493 S20 718 2,216 543 777 800 954 3,0741 4,093 5,158 Income Taxes /32 192 198 209 292 891 231 289 320 382 1.222 1.596 1.909 Effectrve Tax Rate 38% 40% [repeated 3 times] 41% 40% 43% 37% 40% 40‘c 40% 39,1 37% Non-GAAP Net [name 1.186 293 295 311 426 1.325 312 488 480 572 1.852 2.497 3.250 Non-GAAP EPS 50.51 $0.12 [repeated 3 times] $0.17 50.54 50.12 $0.19 $0.19 $0.23 50.74 50.98 5115 EBITDA Calculation Operating Income 1.756 381 (743) 377 523 538 373 562 573 674 2,210 3,126 4,042 Stock-based compensated., 217 103 1,106 179 184 1,572 170 224 227 258 880 866 954 Payroll Tax Related to SEC 6 152 (31) 29 150 20 8 Depteciabon and Arnortzation 323 110 139 176 224 649 241 230 245 249 965 1.111 1.396 EBITDA 2.302 594 654 701 HO 2.909 804 1,024 1,045 1.182 4.055 5.102 6.392 2011A 1012A 2012A 3012A 4012A 2012A 1013A 2013A 3013E 4013E 2013E 2014E 2015E WY Growth Revenue 88% 45% 32% 32% 40% 37% 38% 53% 50% 35% 44% 31% 24% Cost of Revenue 73% 63% 43% 36% 59% 49% 48% 54% 50% 36% 46% 30% 23% Gross Profit 93% 39% 29% 31% 35% 33% 34% 53% 50% 36% 43% 32% 24% Marketing and Sales 110% 100% 48% 38% 40% 52% 29% 74% 69% 77% 63% 34% 19% Research and Development 102% 75% 78% 89% 91% 85% 77% 66% 54% 54% 61% 42% 28% General and Administrative 101% 50% 123% 139% 120% 109% 110% 13% 18% 16% 30% 29% 21% Stock-based Compensation 985% 1371% 1628% 156% 142% 624% 65% -80% 27% 40% -44% -2% 10% Total Operating Expenses 146% 130% 481% 85% 99% 197% 69% -51% 50% 41% -1% 29% 20% Total Operating Expenses (Ex-SBC) 88% 71% SO% 57% 67% 63% 56% 52% 49% 44% 50% 33% 23% Operating Income 70% -2% -283% -9% 4% 49% -2% NM 52% 29% 311% 41% 29% PF Operating Income 88% 23% 8% 8% 18% 14% 16% 54% 52% 27% 37% 29% 25% GAAP Net Income 65% -#216 465% -139% -79% -95% 7% NM NM 508% NM 45% 33% GAM EPS -trA -179% -125% -80% -95% 1% NM NM 506% NM 42% 30% Non-GAAP EPS 20% 4% 4% 2% 5% 1% 62% 58% 34% 38% 32% 28% EBITDA 93% 33% 19% 21% 32% 26% 35% 57% 49% 23% 39% 26% 25% OM Growth Revenue -6% 12% 7% 26% -8% 24% 5% 14% Operating Income -30% -295% -151% 39% -29% 51% 2% 18% PF Operating Income -22% 6% 2% 40% -24% 41% 1% 17% EBITDA 48% 10% 7% 37% -16% 27% 2% 13% % of Revenue Ccet of Revenue 22.9% 25.8% 24.9% 25.1% 24.4% 25.0% 27.7% 25.0% 25.0% 24.5% 25.4% 25.1% 25.0% Gross Profit 77.1% 74.2% 75.1% 74.9% 75.6% 75.0% 72.3% 75.0% 75.0% 75.5% 74.6% 74.9% 75.0% Marketing and Sales 10.3% 12.9% 11.4% 11.8% 10.2% 11.4% 12.0% 13.0% 13.3% 13.3% 13.0% 13.2% 12.7% Research and Development 7.4% 8.8% 9.5% 11.3% 9.9% 9.9% 11.3% 10.3% 11.5% 11.2% 11.1% 12.0% 12.4% General and Administrative 6.1% 6.8% 10.7% 10.2% 9.0% 9.3% 10A% 7.9% 8.0% 7.7% 8.4% 8.2% 8.0% Stock-based Compensation 5.8% 9.7% 93.4% 14.2% 11.6% 30.9% 11.7% 12.4% 12.0% [repeated 3 times] 9.0% 8.0% Operating Income 47.3% 36.0% -62.8% 29.9% 33.0% 10.6% 25.6% 31.0% 30.2% 31.3% 30.2% 32.5% 339% PF Operating Income 53.3% 45.7% 433% 41.6% 46.4% 44.4% 38.6% 438% 422% 43.3% 42.2% 41.5% 41.9% EBITDA 62.0% 56.1% 552% 55.5% 60.6% 57.2% 55.1% 56.5% 55.1% 54.9% 55.4% 53.0% 53.6% Source: J.P. Morgan estrretes.Conwany data. 6 EFTA01104718 Doug Anmuth North America Equity Research 25 July 2013 J.P.Morgan Figure 4: Facebook Revenue Segment Summary 2O11A 1012A 2O12A 1012A 4012A 2O12A 1O13A 2011A 3013E 4011E 2013E 2014E 2015E ummary Advertising 3.154 872 992 1.086 1.329 4279 1.245 1.599 1.693 1.952 6.489 8.830 11.161 WY Grov4h 69% 37% 28% 36% 41% 36% 43% 6I% 56% 47% 52% 36% 26% Ex-FX Revenue (Y/Y) 38% 33% 43% [repeated 3 times] 63% 44 Smyth a 14% 9% 22% -6% 28% 6% 15% % of Total Revenues 85% 82% 84% 86% 84% 84% 85% 88% 89% 91% 89% 92% 94% Payments and Other Fees 557 186 192 176 256 810 213 214 203 201 831 788 762 WY Growth 425% 98% 61% 13% 36% 45% 15% 11% 15% -21% 3% -5% -3% CVO Growth -1% 3% -8% 45% -17% 0% -5% -I% % of Total Revenues 15% 18% 16% 14% 16% 16% 15% 12% 11% 9% 11% 8% 6% Total Revenue 3,711 1,058 1,184 1,262 1,585 5,089 1,458 1,813 1,896 2,153 7,320 9,618 11,924 WY Growth 88% 45% 32% 32% 40% 37% 38% 53% 50% 36% 44% 31% 24% WY Growth (Ex-FX) 86% 46% 36% 38% 42% 41% 414 Growth a 12% 7% 26% a 24% 5% 14% Seasceality 21% 23% 25% 31% 20% 25% 26% 29% Revenue per MAU (ARPIN Summary US & Canada $11.50 $2.90 $3.20 $3.40 $4.08 $13.61 $3.50 $4.32 $424 $4.83 $18.95 $19.59 $22.64 Europe $5.61 $1.40 $1.43 $1.37 $1.71 $5.94 $1.60 $1.87 $1.82 $1.99 $7.33 $8.84 $10.43 Asia $2.08 $0.53 $0.55 $0.58 $0.69 $2.37 $0.64 $0.75 $0.78 $0.76 $2.96 $3.39 $3.88 Rest of World $1.56 $0.37 $0.44 $0.47 $0.56 $1.88 $0.50 $0.63 $0.79 $0.96 $2.95 $4.14 $4.68 Total $5.11 $1.21 $1.28 $1.29 $1.54 $535 $1.35 $1.60 $161 $1.77 $6.38 $7.28 $8.05 XaSamith US & Canada 33% 17% 73% 22% 28% 18% 21% 35% 25% 18% 25% 16% 16% Europe 46% 18% 7% 2% 7% 6% 14% 31% 33% 16% 23% 21% 18% Asia 40% 25% 17% 3% 22% 14% 21% 36% 36% 11% 25% 14% 14% Rest of World 468% 78% 13% 78% 38% 21% 36% 44% 70% 70% 57% 40% 13% Total 25% 7% 1% 4% 12% 5% 11% 25% 25% 15% 19% 14% 11% Growth us& Canada -9% 10% 6% 20% -14% 23% -2% 14% Europe -73% 2% -4% 25% -7% 17% -2% 9% Asia -6% 4% 5% 19% -7% 18% 4% -3% Rest ol World -9% 19% 6% 2f% -11% 26% 26% 21% Total -12% 5% 1% 19% -12% 19% 1% 10% Geo ra • hic Revenue Breakdown Based on User Location US & Canada 1.914 525 590 637 780 2.532 679 848 840 963 3.330 3,957 4.649 Europe 1.155 328 346 341 440 1.455 423 505 499 552 1.979 2,518 3.010 Asia 363 118 135 154 198 605 197 247 274 280 998 1,397 1.863 Rest of World 218 87 113 130 167 497 159 213 283 359 1.013 1.746 2.321 Total 3,711 1,058 1,184 1,262 1,585 5.089 1.458 1.813 1.896 2,153 7,320 9,618 11,924 % of Total US & Canada 52% 50% [repeated 3 times] 49% 50% 47% 47% 44% 45% 45% 41% 39% Europe 31% 31% 29% 27% 28% 29% 29% 28% 26% 26% 27% 26% 26% Asia 10% 11% 11% 12% [repeated 3 times] 14% [repeated 3 times] 13% 14% 15% 16% Rest of World 8% 8% 10% 10% 11% 10% 11% 12% 15% 17% 14% 18% 19% Total 100% 103% 100% [repeated 11 times] YN Growth US & Canada 67% 33% 25% 32% 38% 32% 29% 44% 32% 23% 32% 19% 17% Europe 100% 43% 26% 18% 22% 26% 29% 46% 46% 25% 36% 27% 23% Asia 145% 90% 65% 48% 72% 67% 67% 83% 78% 41% 65% 40% 33% Rest of World 907% 89% 69% 68% 90% 79% 83% 88% 118% 115% 104% 72% 33% Total 95 45% 32% 32% 40% 37% 38% 53% 50% 36% 44% 31% 24% Source: J.P. Megan estimates. 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NA, 569%, 67 0% mtn 511 99... 7471E d 3%, Source: J.P. Waan esbmwes. Compa y Paft 8 EFTA01104720 Dou Anmuth 1 North America Equity Research 25 July 2013 J.P.Morgan Figure 6: Facebook Revenue Drivers — Advertising 2011A 1012A 2O12A 3O12A 4O12A 2012A 1O13A 2O13A 3O13E 4O13E 2013E 2014E 2015E :anti &some Global Advertising Advenising impressions On billions) 15 :: 4,600 4,643 5,015 6.411 20.691 6,394 6,640 6,456 6,065 25,555 22,710 21,113 Y/Y Growth 0/% 35% 18% 27% 48% 33% 39% 43% 28% -5% 21% -11% -7% 0/0 Growth 5% 1% 8% 27% 0% 4% -3% -6% Average Cost Per Thousand (CPM) 30 $0.19 $0.21 $0.22 $0.21 $021 $0.19 $0.24 $0.26 $0.32 $0.25 $0.39 $0.63 Y/Y Growth 20% 1% 8% 7% -4% 1% 3% 13% 22% 55% 23% 53% 36% CVO Growth -12% 13% 1% -4% -6% 24% 9% 23% Global Advertising Revenue 3.154 872 992 1.086 1,329 4.279 1,245 1,599 1,693 1,952 6,489 8,&10 11,161 V/Y Growth 69% 37% 28% 36% 41% 36% 43% 61% 56% 47% 52% 36% 26% 0/0 Growth -8% 14% 9% 22% -6% 28% 6% 15% Re Ana: Seakciovm US & Canada Actrenising Impressions (ri bdions) 4 455 1.203 1.103 1,212 1,337 4.6 : 1.265 1.169 1.175 1.283 4.893 4.697 4.509 WY Growth 8% -2% 14% 16% 9% 5% 6% -3% -4% 1% -4% -4% 0/0 Growth 4% -8% 10% 10% -5% -8% 1% 9% Average Cost Per Thousand (CPM) $0. $0.35 30.43 $0.44 $047 $0.4 $0.44 $0.62 $0.63 $0.67 $0.59 $0.77 $0.96 WY Growth 16% 24% 20% 18% 2 25% 42% 42% 43% 38% 30% 25% CVO Growth -13% 20% 2% 6% -8% 41% 2% 7% US & Canada Advertising Revenue 1.583 419 479 538 631 2,0: 552 721 741 866 2,880 3,595 4,314 YN Growth 48% 26% 22% 36% 37% 31% 32% 51% 38% 37% 39% 25% 20% % of Total Advertising Revenue 50% 48% 48% 50% 47% 48% 44% 45% 44% [repeated 3 times] 41% 39% Europe Advenising Impressions On billions) 5.54 1.803 1.715 1.638 2.045 7.1 : 2,341 2,328 2,162 2,250 9.080 9.535 9.535 WY Growth 40% 26% 27% 27% 30% 30% 36% 32% 10% 26% 5% 0% CVO Growth 12% -5% -5% 25% 14% -1% -7% 4% Average Cost Per Thousand (CPM) $0.t $0.15 $0.17 $0.18 $0.18 $0.1 $0.16 $0.19 $0.20 $0.22 $0.19 $0.24 $0.30 V/Y Growth -5% [repeated 3 times] -4% -5% 3% 13% 13% 20% 12% 25% 25% CIO Growth -20% 13% 5% 2% -14% 24% 5% 8% Europe Advertising Revenue 1.002 274 294 295 374 1,2 367 451 440 494 1,752 2,299 2,874 Y/Y Growth 81% 33% 20% 20% 22% 23% 34% 53% 49% 32% 42% 31% 25% % of Total Adverosing Revenue 32% 31% 30% 27% 28% 29% 29% 28% 26% 25% 27% 26% 26% Asia Advenising Impressions (ri billions) 2.64 650 841 953 1.315 3.7 : 939 1.219 1,287 1.381 4,826 5.309 5.734 VittGrowth 28% 25% 30% 80% 42% 45% 45% 35% 5% 28% 10% 8% 0/0 Growth -11% 29% 13% 38% -29% 30% 6% 7% Average Cost Per Thousand (CPM) $0.1 $0.15 $0.14 $0.14 $0.13 $0.14 $0.19 $0.18 $0.20 $0.19 $0.19 $0.24 $0.30 Y/Y Growth 38% 24% 16% -2% 17% 23% 35% 40% 45% 37% 28% 25% CYO Growth 17% -10% 2% -6% 47% -1% 6% -5% Asia Advertising Revenue 31 99 115 133 168 51 ' 176 225 251 256 908 1,279 1,726 Y/Y Growth 119% 77% 55% 51% 77% 65% 78% 96% 89% 52% 76% 41% 35% % of Total Advertising Revenue 10% 11% 12% 12% 13% 12% 14% 14% 15% 13% 14% 14% 15% Rest of World Advenising impressions (ri barons) 3. 950 984 1,233 1,714 4.881 1.849 1.924 1.832 1.151 6,756 3,169 1,335 Y/Y Growth 77% 25% If% 93% 58% 95% 95% 49% -33% 38% -53% -58% 0/0 Growth 7% 1% 25% 39% 8% 4% 4% -37% Average Cost Per Thousand (CPM) $0. $0.08 $0.11 10.10 $0.09 $0. ' $0.08 $0.10 $0.14 $0.29 $0.14 $0.52 $1.68 Y/Y Growth 5% 32% 22% 1% 14% -4% -1% 46% 221% 49% 272% 222% CVO Growth -8% 25% -8% -6% -11% 29% 35% 106% ROW Advertising Revenue 2 80 104 120 156 4 : 150 202 260 336 949 1,658 2,248 Y/Y Growth 934% 86% 65% 71% 95% 80% 88% 94% 117% 116% 106% 75% 36% % of ToralAdverosi Revenue 8% 9% 10% 11% 12% 11% 12% 13% 15% 17% 15% 19% 20% Source: J.P. Morgan esbrnales. Company data. 9 EFTA01104721 Dote Anmuth 1 North America Equity Research 25 July 2013 J.P.Morgan Figure 7: Facebook Revenue Drivers - Payments and Other Fees 2011A 1012A 2012A 3012A 4012A 2012A 1013A 2013A 3013E 4013E 2013E 2014 I Ml i Olobol PaymoMs and Othoe Foos Total Payments and Other Fax 557 156 192 176 256 410 213 214 203 201 631 788 762 WY GA:ren 425% 98% 0% 73% 36% 45% 15% t I% 15% -21% 3% .5% -3% 0'0 Womb a 2% .816 45% -17% 0% -5% -1% 0.96 R•vonue pot Avg. DAI) $1.35 30.37 30.34 3031 $0.43 $1.47 3033 30.31 30.21 30.27 $1.20 $1.00 30.48 WYGrakil 232% 37% 16% -13% 8% 7% -10% -12% -9% -37% -1595 47% -12% CM0 GrOw01 -8% -3% -13% 37% -22% -5% -10% -5% Revolt* For Avg. NAV IAPJF17. $0.77 30.21 $0.21 30.15 $025 30.8$ 3020 3.0.19 30.17 30.17 $0.72 30.60 30.51 YI Y Grovel, 250% 406 23% -12% 9% 71% .8% .9% .4% 33% .15% -18% .14% CVO GrOwtn . 7% -3% 03,, 16% .71% .4% 9%. -41, 20114 1012A 2012A 30124 40124 2012A 10134 20134 3013E 4013E 2013E 7014E 2015E "11___ I F•cobook Pisyniarito Revenue From Zyngs (30% lake: 436 120 101 88 151 462 75 57 57 62 251 225 210 YI Y Groot, 35% .6% -24% 23% 6% -38% -45% -35% -59% -46% -70% -8% On] Growth -2% -14% -15% 72% -50% -25% 1% 9% % of FS Per11611:5 R.,, , ria. NA 64% 54% 50% 59% 57% 35% 26% 28% 31% 30% 29% 28% % of Fe Total Rtet.140 NA 11% 9% 7% 10% 9% 6% 3% [repeated 4 times] 2% 2% Othor Psymonis Revenue (excl. Zynge; 121 64 59 III 105 346 13$ 157 144 139 580 563 552 YIY Grata NA NA 120% 105% 189% 709% 78% 65% 32% 87% -3% -2% 0.0 Growth 0% 34% 0% 19% 31% Id% -7% .5% % of FB Payments Remits ut 36% 46% 50% 41% 43% 65% 74% 72% 69% 70% 71% 72% Total 'setback Payments Revenue (Bottom-up 567 186 192 176 266 810 213 214 203 201 631 7811 762 WY Gromb 425% 98% 61% 13% 36% 45% 15% 11% 15% -21% 3% -5% -3% 000.'oalh 4% 2% -8% 45% -17% 0% -5% -1% Source: J.P. Morgan esorriales. Company data. 10 EFTA01104722 Dow Anmuth 1 North America Equity Research 25 July 2013 J.P.Morgan Figure 8: Facebook User Metrics by Region 2011A 1012A 20124 3012A 4012A 20124 set Moines Monthly Active Users (MAU) US 8 Canada 179 183 188 189 193 193 195 198 199 200 200 204 207 Europe 229 239 246 253 261 261 269 272 276 279 279 293 302 Asia 212 234 255 277 298 298 319 339 359 375 375 449 516 Rest of World 225 245 268 288 304 304 327 346 386 383 383 460 533 Total 845 901 955 1.007 1,058 1.058 1,110 1.155 1,199 1.238 1,238 1,40 1,558 WY Growth US 8 Canada 18% 12% 10% 7% 8% 8% 7% 6% 5% 4% 4% 2% 1% Europe 25% 19% 16% 14% [repeated 3 times] 13% 11% 9% 7% 7% 5% 3% Asia 54% 50% 47% 41% [repeated 3 times] 36% 33% 30% 26% 26% 20% 15% Rest of World 69% 53% 46% 39% 35% 35% 33% 29% 27% 26% 26% 20% 16% Teta/ gauntry mug 39% 33% 29% 26% 25% 25% 23% 21% 19% 17% 17% 14% 11% US 8 Canada 21% 20% 19% 19% 18% [repeated 3 times] 17% 17% 16% 16% (5% 13% Europe 27% 27% 26% 25% [repeated 3 times] 24% 24% 23% [repeated 3 times] 21% 19% Asia 25% 26% 27% 28% [repeated 3 times] 29% 29% 30% [repeated 3 times] 32% 33% Rost of World 27% 27% 28% 29% [repeated 4 times] 30% 31% [repeated 3 times] 33% 34% Total 100% [repeated 13 times] Mobile MAU 432 488 543 604 680 880 751 819 875 928 928 1.13 1,324 Y/Y Growth 76% 69% 67% 81% 57% 57% 54% 51% 45% 37% 37% 23% 16% 0/O Growth 13% 11% 11% 13% 10% 9% 7% 6% % of total MAUs 51% 54% 57% 60% 64% 64% 68% 71% 73% 75% 75% 81% 85% Mobile-Only MAU 58 83 102 126 157 157 189 219 248 266 268 387 499 Y/Y Growth 287% 277% 240% 215% 171% 171% 128% 115% 95% 69% 69% 45% 29% 0/O Growth 43% 23% 24% 25% 20% 16% 12% 8% % of total MAUs 7% 9% 11% 13% 15% 15% 17% 19% 21% 22% 22% 28% 32% Web and Mobile MAU 374 405 441 478 523 523 562 600 630 662 862 762 826 Y/Y Growth 63% 52% 49% 42% 40% 40% 39% 36% 32% 27% 27% 14% 10% CVO Growth 8% 9% 8% 9% 7% 7% 5% 5% % of total MAUs 44% 45% 46% 47% 50% 50% 51% 52% 53% 54% [repeated 3 times] 53% Web MAU 787 818 853 881 899 899 921 936 953 972 972 1.019 1.059 Y/Y Growth 33% 24% 20% 1896 14% 14% 13% 10% 8% [repeated 3 times] 5% 4% 0/0 Growth 4% 4% 3% 2% [repeated 5 times] % of total MAUs 93% 91% 89% 87% 85% 85% 83% 81% 80% 79% 79% 73% 68% Web Only MAU 413 413 412 403 376 376 359 336 324 309 309 267 234 Y/Y Growth 14% 5% 0% -5% -9% -9% -13% -18% -20% •18% •18% -14% -12% CVO Growth 0% 0% -2% -7% -5% -6% -4% -4% % of total MAUs 49% 46% 43% 40% 38% 36% 32% 29% 27% 25% 25% 19% 15% Daily Active Users (DAU) US 8 Canada 126 129 130 132 135 135 139 142 143 144 144 151 155 Europe 143 152 154 160 169 169 179 182 190 195 195 211 222 Asia 105 119 129 141 153 153 187 181 194 207 207 260 310 Rest of World 109 126 139 151 161 161 180 194 208 222 222 290 352 Total 483 526 552 584 618 618 665 699 738 768 768 912 1,039 Mobile DAUs 293 329 374 374 425 489 Y/Y Growth 60% 0/0 Growth 12% 14% 14% 10% % of Mobile MAUs 54% 54% 55% 55% 57% 57% DAU as % of MAU US 8 Canada 70% [repeated 6 times] 71% 72% [repeated 4 times] 74% 75% Europe 62% 64% 63% 63% 65% 65% 67% 67% 69% 70% 70% 72% 74% Asia 50% 51% [repeated 5 times] 52% 53% 54% 55% 55% 58% 60% Rest of World 48% 51% 52% 52% 53% 53% 55% 56% 57% 58% 58% 63% 66% Total 57% 58% [repeated 3 times] 59% 59% 60% 61% 61% 62% 62% 65 67% WY Growth US 8 Canada 27% 23% 17% 6% 7% 7% 8% 9% 8% 7% 7% 5% 3% Europe 34% 27% 21% 19% 18% [repeated 4 times] 19% 16% 16% 8% 5% Asia 64% 65% 52% 44% 46% 46% 40% 40% 37% 35% 35% 28% 19% Rest of World 91% 68% 58% 51% 48% 48% 43% 40% 38% [repeated 3 times] 30% 22% TOM f 48% 41% 32% 28% [repeated 3 times] 26% 27% 26% 24% 24% 19% 14% Country Mix US 8 Canada 26% 25% 24% 23% 22% 22% 21% 20% 19% [repeated 3 times] 17% 15% Europa 30% 29% 28% 27% [repeated 4 times] 26% 26% 25% 25% 23% 21% Asia 22% 23% 23% 24% 25% [repeated 3 times] 26% 26% 27% 27% 29% 30% Rest of World 23% 24% 25% 28% 26% 26% 27% 28% 28% 29% 29% 32% 34% Total 100% [repeated 13 times] 10134 20134 3013E 4013E 2013E 2014E 2015E Source: J.P. Morgan estrreles. Company dela. 11 EFTA01104723 North America Equity Research 25 July 2013 Facebook: Summary of Financials Income Statement - Annual FY12A FY13E FY14E FY15E Income Statement - Quarterly 1013A 2013A 3013E 4013E Revenues 5.089 7.320 9.618 11.924 Revenues 1.458A 1.813A 1.896 2.153 Operating income 538 2.210 3.126 4,012 Operating income 373A 562A 573 674 D&A 649 965 1.111 1,396 D&A 241A 230A 245 249 EBITDA 1,187 3.175 4236 5.439 EBITDA 614A 792A 818 923 Net interest Income f (expense) (37) 0 [repeated 3 times] Net interest income / (expense) (15)A (11)A 0 0 Other income 1 (expense) (44) (16) 102 162 Other kome I (expense) (20)A (17)A 0 21 Pretax income 494 2.191 3228 4,204 Pretax income 353A 545A 573 035 Inane taxes (441) (904) (1.356) (1,724) Income taxes (134)A (212)A (252) (306) Nel Income 53 1290 1.872 2,481 Net Income 219A 333A 321 389 VYaghted average ct 'Wed shares 2,474 2.507 2.557 2,608 Weighted average diluted shares 2,499A 2.502A 2,511 2,515 Diluted EPS 0.54 0.74 0.98 1.25 Muted EPS 0.12A 0.19A 0.19 023 Balance Sheet and Cash Flow Data FY12A FY13E FY14E RISE Ratio Analysis FY12A FY13E FY14E FY15E Cash and cash equiralents 2,384 3.842 7.133 10,601 Sales growth 37.1% 43.8% 31A% 24.0% Accounts receivable 719 861 1.020 1,192 EBITDA growth 26A% 39.4% 25.8% 25.3% Other ctrrent assets 922 1206 1250 1,443 EPS growth 53% 38.0% 322% 27.6% Current assets 11,267 13.160 16.654 20.687 PP&E 2,391 3.066 4.1(0 4.509 EBITDA margin 57.2% 55.4% 532% 53.6% Total assets 15,103 17,952 22.479 27.323 Net margin 26.0% 25.3% 262% 27.3% Total debt 1,500 0 [repeated 3 times] Debt / EBITDA 0.5 0.0 [repeated 3 times] Total labittes 3,348 2,140 2.358 2.560 Shareholders equity 11,755 15.812 20.121 24.762 Return on assets (ROA) 12.2% 112% 12.4% 13.1% Return on equity (ROE) 15.6% 13.4% 132% 145% Net Income (inducing charges) 53 1262 1.872 2.481 D&A 649 965 1.111 1.396 Enterprise value I EBITDA 19.0 12.9 9.6 7.1 Change in working capital (513) (98) 16 (163) Enterprea value I Free cash low 135.6 22.6 15.1 10.8 Other FIE 1237.6 515 36.2 27.9 Cash flow from operations 1,614 3.544 4.881 5.875 Capes (1,235) (1.224) (1.635) (1,669) Free cash flow 409 2.320 3246 4,205 Cash flow from imesfing actiNibes (7,024) (1A53) (1.635) (1,669) Cash flow from financing activities 6,283 (78) (510) (537) Dividends Dividend yield J.P.Morgan Source: Company reports and J.P. Morgan estimates. Note: h rams (except per-snare data).Fiscal year ends Dec 12 EFTA01104724 Dou Mrnuth 1 North America Equity Research 25 July 2013 J.P.Morgan 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 (I) 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. 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Morgan received in the past 12 months compensation from 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 httos://mmiomorean.com/disclosuresicompanv calling 1-800-477-0406, or e-mailing researclixlisclosure.inouiriesktinmorgan.com with your request. J.P. Morgan's Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research di‘closure.inouiriesOipmergan.com. Facebook (FB. FB US) Price Chart • Aug Dec Mar Jul 12 12 19 15 Societe. Bloomitipp and JP. Morph. price data aidpittocl foe scoot splits mid disidtalds_ 'Mimed CO.OINO Jun 27. 2012. Date Rating Share Price (S) Price Target ($) 27-Jun-12 OW 33.10 45.00 04-Sep-12 OW 18.06 30.00 05-Oct-12 OW 20.91 28.00 24-Oct-12 OW 23.23 29.00 02-Jan-13 OW 28.00 35.00 13 EFTA01104725 Dots Anmuth North America Equity Research 1 25 July 2013 J.P.Morgan 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 or designations: OW - Overweight, N- Neutral, UW Underweight, NR Not Rated Explanation of Equity Research Ratings, Designations 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 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 underperfonn the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock's 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 analyst's coverage universe can be found on J.P. Morgan's research website, www.jpmorganmarkets.com. Coverage Universe: Anmuth, Doug: Amazon.com (AMZN), Bankrate Inc (RATE), CafePress, Inc. (PRSS), Expedia, Inc. (EXPE), Facebook (FB), Google (GOOG), Groupon (GRPN), HomeAway Inc (AWAY), Linkedln Corp (LNKD), Neal ix Inc (NFLX), Pandora Media Inc (P), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), TripAdvisor, Inc. (TRIP), Trulia Inc. (TRLA), Yahoo Inc (YHOO), Zynga Inc (ZNGA), eBay, Inc (EBAY) J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013 Overweight Neutral (buy) (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 12% IB clients* 56% 50'/. 40% JPMS Equity Research Coverage 42% 50% 8% IB clients* 76% 66% 55% *Percentage of investment banking clients in each rating category. For purposes only of FINRAJNYSE ratings distribution rules, our Overweight rating falls into a buy rating category: our Neutral rating falls into a hold rating category; and our Undenveight rating falls into a sell rating category. Please note that stocks with an NR designation arc not included in the table above. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at hnnlAvww.inmorganmarkets.com contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.innuiriesainmornan.com. 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