Social Network Service and Facebook
1 . How does Facebook make money? What are the value drivers of its business? What is its comparative advantage relative to other social networking companies?
Advertising accounted for 98 per cent of Facebook’s revenues in 2009, 95 per cent in 2010 and 85 per cent in 2011. Facebook offered advertisers the opportunity to segment and target its users based on their demographic information, expressed interests and social connections.
Another part of the revenue was generated by its payments business, which came almost exclusively from the sale of virtual goods used in social games sold through the online gaming company, Zynga.
Facebook’s value driver is dependent on how well they adapt to their ever-growing pool of competitors. Twitter is …show more content…
4. What is the intrinsic value of a Facebook share? How does this value compare to the price being discussed by the underwriters?
What is intrinsic value? Consider it the value that would be attached to an asset by an all-knowing analyst with access to all information available right now and a perfect valuation model. No such analyst exists, of course, but we all aspire to be as close as we can to this perfect analyst. Using discounted cash flow models is in some sense an act of faith. We believe that every asset has an intrinsic value and we try to estimate that intrinsic value by looking at an asset’s fundamentals.
Every asset that generates cash flows has an intrinsic value that reflects both its cash flow potential and its risk. The problem lies in the fact that none of us ever gets to see what the true intrinsic value of an asset is and we therefore have no way of knowing whether our discounted cash flow valuations are close to the mark or not. In this case study, the intrinsic value of a Facebook share is same as the estimated values / share in the spreadsheet Facebook IPO: $32.43.
Facebook had filed its first Red Herring on February 1, 2012, but the underwriters did not go out to investors with a formal price range until early May.