NASDAQ: FB

FB 1 Year Price Chart

No Real Competition

FB v. TWTR

• Broadly, Facebook’s dominance in social media, sustainable competitive advantage, and forward-looking investments enable the potential for substantial monetization over time and thus position the company for long-term growth.

• FB is a buying opportunity, as I believe the market has not fully priced in revenues from Instagram and higher quality ad offerings, which will be reflected in Q3 (Nov. 4th) and Q4 earnings.

• Timeframe: 4 months, then reevaluation.

• Target Price: $112.75

Investment Thesis

Sustainable Competitive Advantage

User Retention

• Potential revenue boost from favorable exchange rates in Q3 & Q4

• International revenue accounts for 55% of total revenue

• With a 2015 rate hike becoming unlikely, the dollar is expected to drop against the Pound, Euro, and certain Asian currencies

• Instagram Ad Rev ramp up, this is a meaningful driver of engagement and ad revenue growth

• Given FB has fully opened ad-buying interface channels to Instagram, I predict Instagram will generate approx. $559 M in revenue this quarter, and $609 M by year end.

• This is expected to be reflected in Q3&4 revenue

• Higher quality ad formats, such as video gain traction

Near-term Catalysts

• Expanding ads to Instagram, which has over 400 million monthly active users will only help solidify its market share

• Previously open to a select group of brand in the US, now any company can advertise on the platform with a “self-serve” option

• Recent jump in advertising on Instagram, which is expected to be reflected in Q3 and Q4

Instagram

Earnings Estimates Comparison

• Even with conservative estimates on incoming revenue (excluding Instagram), my analysis forecasts approx. $4.329 B in revenue for Q3 2015

Rev ($ Millions) Q4' 14 A Q1' 15 A Q2' 15 A Q3' 15 E Q4' 15 ERest of World 403 354 415 419 448 Asia-Pacific 554 542 623 679 733 Europe 1,030 908 1,037 1,047 1,173 US & Canada 1,864 1,739 1,967 2,183 2,467 Total (Conservative) 3,851 3,543 4,042 4,329 4,822

Rev. Growth Assumptions Q4' 14 A Q1' 15 A Q2' 15 A Q3' 15 E Q4' 15 ERest of World 14% -12% 17% 1% 7%Asia-Pacific 13% -2% 15% 9% 8%Europe 22% -12% 14% 1% 12%US & Canada 23% -7% 13% 11% 13%Total 20% -8% 14%

Revenue + Instagram

Compared to the revenue estimate, I expect Instagram to generate an extra $559 million, which will trickling down the bottom line. This may be offset by increased spending on R&D and increased operational costs as alluded by management in previous earnings calls.

Instagram Users (Millions) ARPU Timing Discount Projected RevenueQ3' 15 E 400 2.80 0.5 559.70Q4' 15 E 410 2.97 0.4 609.71

Rev + Instagram Q1' 15 A Q2' 15 A Q3' 15 E Q4' 15 ETotal 3543 4042 4889 5432

2015 FB Revenue Projections

Q2' 13 A Q3' 13 A Q4' 13 A Q1' 14 A Q2' 14 A Q3' 14 A Q4' 14 A Q1' 15 A Q2' 15 A Q3' 15 E Q4' 15 E0

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Rest of World Asia-Pacific Europe US & Canada Total (Conservative) Total Adj.

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Total Revenue, blue line is a conservative estimate of

Mobile Ad Growth

Industry Video Ad Growth

“Facebook pages are now sharing more than 40% more videos than before. Video is still the richest form of media” – Zuckerberg

“She also touched on video, and how it was driving Facebook's advertising growth. One of the thing's that's valuable about Facebook video advertising, she said, is that advertisers can target viewers extremely specifically. ” – Sheryll Sandberg, COO

• Sept. 28th Facebook 40 minute outage is third time in 11 days, losing $1.2 M in revenue

• Massive user base expected to taper off revenue growth going into 2016

• Trade-off between user-centric focus and ad revenue

• Management has alluded to this in earnings calls

• Potential necessary capital needs as a result of competitive intensity and for continued growth

• Unexpectedly low user engagement amidst intensive competition

Near-term Risks

• User-first focus may compromise advertising and cause short-term revenue risk and volatility

• Competition from other social services

• TWTR, LNKD, GOOG+, Snapchat

• Competition from online and mobile ad dollars from GOOG (still represents the largest company in total online advertising revenue)

• Future privacy, security, and regulatory risks that pose a threat to FB’s business model

Long-term Risks

Appendix

Competitor Snapshot

Profit Margins

2015 Q22015 Q12014 Q42014 Q32014 Q22014 Q12013 Q42013 Q32013 Q22013 Q12012 Q42012 Q30

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Total Ad Revenue ($M)

YHOO US Equity FB US Equity FB US Equity (Mobile) EBAY US EquityAOL US Equity IACI US Equity TWTR US Equity LNKD US Equity

Total Ad Revenue Comparison

• Still early in monetizing FB’s base of 1.49 B users

• Expansion to untapped marketplaces, for user and revenue growth

• China, India, and Africa

• Strengthening franchises in Instagram, Messenger & WhatsApp

• Developing the Ad Platform:

• Higher quality brand advertisers

• Use of High-value ad formats (video &app install ads)

• Introducing self-serve functionality (opens up platform to more advertisers)

• Ramp of video in FB mobile newfeeds

Long-term Catalysts

FB’s ROIC?

Rising R&D Expenditures

Average Revenue Per User

Analyst Consensus

Mobile Ad Global Position