>FACEBOOK INC: Initiating With Neutral & $35 PT – Easy To “Like,” Hard To Love

 Significant Long-Term Potential Offset By Medium-Term Risk — Facebook has established itself as an Internet Utility. It could become the largest ‘Net Platform one day in terms of Revenue & Profits, given the size & engagement of its user base and its biz model. But with a 50X 2013 P/E, much of this potential has been priced in. Further, FB appears to have hit a Fundamentals Air Pocket, given its decelerating MAU growth (27% in ’12 vs. 48% in ’11 -- law of large numbers) and its softening ARPU growth (2% in ’12 vs. 27% in ’11 – economy, unmonetized Mobile channels, and correctly conservative Monetization strategy). Super-high multiples & Deceling growth don’t mix well. Add a limited visibility Biz Model & an unproven Team and you have a Neutral.


 Biggest Investment Positives Are… — 1. Substantial Market Opportunities – incl. a Global Internet Ad market that should reach $130B by 2015; 2. An Almost Unassailable Position As THE Social Networking Leader – 900MM+ MAUs & 525MM+ DAUs; 3. Significant Network Effects advantages – probably greater than any ‘Net company; 4. Major Monetization Potential – currently generating less than $5 in annual Revenue per MAU; & 5. Platform/Option Potential – with a massive, highly engaged user base, FB has the potential to layer in more Revenue streams over time…Ad Network, Transactions/Subscriptions revenue share, Digital Media sales, etc…


 Biggest Investment Risks Are…— 1. Dual-Class Stock Structure – with questions about mngmt’s views towards public shareholders; 2. Limited Appeal To Advertisers Today – based in part on our 800-person Ad Age Citi Panel survey; 3. Unclear Mobile Monetization – 30%+ of total usage today may not generate meaningful Revenue for a long time; 4. Zero Presence In Largest ‘Net Market – China; and 5. Lockup Expiration/Stock Supply Risk – which has materially impacted every other ‘Net IPO.


 Deriving Our $35 PT – We use a combination of P/E (40X our 2014 EPS of $0.85), EV/EBITDA (15X our 2014 EBITDA of $5.0B), and DCF. These are Premium Multiples, but we view the company’s growth rate (30% EPS CAGR thru 2015) and Option Potential as supporting them.


 What Would Make Us… -- Bullish? A material correction vs. our PT, clear signs of Mobile Monetization, evidence that Advertisers are aggressively engaging with FB, and the development of new Revenue streams. Bearish? Material appreciation above our PT, clear signs of FB user fatigue, lack of monetization improvements.


To read report in detail: FACEBOOK INC