EFTA01104689

North America Equity Research J.P. Morgan 12 September 2013 Overweight Facebook FB, FB US Pike: $45.04 Expecting Strong Advertising Traction to Build Toward A Price Target: $53.00 Year-End & Into '14; Reiterate Overweight, PT to $53 Previous: $44.00 We are incrementally positive on Facebook shares as we believe advertising traction Internet across both Mobile and Desktop continues to build into year-end and 2014. 2Q13 Doug Anmuth AC marked an inflection point in advertiser demand and ad quality for Facebook, which enabled the company to increase inventory while simultaneously realizing higher pricing. We believe that momentum in the ad platform continues as marketer feedback Bloomberg JPMA ANMUTH cGO> around Mobile, News Feed, and FBX continues to improve along with ROI. We are Kalzad Gotta, CFA raising our Mobile and Desktop News Feed estimates going forward, and we project Mobile will surpass 50% of Facebook's ad revenue in 4Q13 and represent 60% of ad revenue in 2014. We reiterate our Overweight rating and are raising Bo Nam our price target from $44 to $53. • Seeing a broader advertiser base in 3Q. During 3Q we believe Facebook has Diana R Kluger expanded its advertiser base, with a notable pick-up in Entertainment industry ads across TV shows, movies, and console game launches. These ads often J.P. Morgan Securities LLC feature click-to-play video—which bodes well for Facebook's likely more formal launch of News Feed video ads in coming months—and they likely command Price Performance premium pricing based on guaranteed timing and the more advanced format. 4 • FBX ramping up. The Facebook Exchange (FBX) was a small contributor in 2Q, but we believe it will become an increasingly important part of Facebook's ad platform as re-targeted ads move further into the Desktop and Mobile News Is Sepl2 Ost.12 IbM3 AMI MO3 Feeds. Our anecdotal checks suggest that FBX ads have increased notably in the Fe stare price 0) Desktop Right Rail—often representing the majority of ads shown—and marketer S1P500 (tamed) feedback after a few months of FBX in the Desktop News Feed is positive. Triggit YTD 1m 3m 12m data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Abe 609% 17.0% 87.4% 131.8 % Desktop News Feed and increased adoption of dynamic ads are driving a 27x Rel 45.4% 17.1% 815% 114.0 increase in CTRs and a 50% decrease in eCPC (implying a 13-14x increase in % CPMs) since the end of 2012. • Estimate and PT increases. Mobile estimates in our bottom-up model increase to $2.968 in 2013 and $5.95B in 2014, up from $2.838 and $5.098 previously, increases of 3% and 12%. We now project 2013 and 2014 non-GAAP EPS of $0.76 and $1.09. We reiterate our Overweight rating and are raising our price target from $44 to $53 based on the average of our DCF analysis ($56), 17x 2015E EBITDA ($56), and 33x 2015 non-CAAP EPS ($47). Facebook Inc. (FB;FB US) FYE Dec 2012A 2013E 2013E 2014E 2014E 2015E 2015E Company Data (Prey) (Corr) (Prev) (Curr) (Prey) (Cur') Price (5) 45.04 EPS - Repotted (S) Date Of Price 11 Sep 13 01 (Mar) 0.12 0.12A 0.12A 52-week Range (5) 45.09-18.80 02 (Jun) 0.12 0.19A 0.19A Market Cap ($ mn) 110,393.00 03 (Sep) 0.12 0.19 0.20 Fiscal Year End Dee 04 (Dec) 0.17 0.23 0.24 Shares 0/S (mn) 2,451 FY 0.54 0.74 0.76 0.98 1.09 1.25 1.43 Price Target ($) 53.00 CONSENSUS_EPS Price Target End Date 31-Dec-14 Bloomberg EPS FY (5) 0.51 - 0.71 0.95 1.26 Source: Company data. Bloomberg. J.P. Morgan estimates. See page 17 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. Asa 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 EFTA01104689 Dou Animal North America Equity Research 12 September 2013 J.P. Morgan Expecting Strong Advertising Traction to Build Toward Year-End and Into 2014; Reiterate Overweight, Price Target to $53 We are incrementally positive on Facebook shares as we believe advertising traction across both Mobile and Desktop continues to build into year-end and 2014. 2Q13 marked an inflection point in advertiser demand and ad quality for Facebook, which enabled the company to increase inventory while simultaneously realizing higher pricing. We believe that momentum in the ad platform continues as marketer feedback around Mobile, News Feed, and FBX continues to improve along with ROI. We do not believe ongoing strength is attributable to one single driver, but rather the combined impact of stronger sales efforts, improved advertiser education, better tracking and measurement, and simplified ad formats. During 3Q we believe Facebook has expanded its advertiser base, with a notable pick-up in Entertainment industry ads across TV shows, movies, and console game launches. These ads often feature click-to-play video—which bodes well for Facebook's likely more formal launch of News Feed video ads in coming months— and they likely command premium pricing based on guaranteed timing and the more advanced format. The Facebook Exchange (FBX) was a small contributor in 2Q, but we believe it will become an increasingly important part of Facebook's ad platform as re- targeted ads move further into the Desktop and Mobile News Feeds. Our anecdotal checks suggest that FBX ads have increased notably in the Desktop Right Rail—often representing the majority of ads shown—and marketer feedback after a few months of FBX in the Desktop News Feed is positive. Triggit data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Desktop News Feed and increased adoption ofdynamic ads are driving a 27x increase in click- through rates (CTR) and a 50% decrease in eCPC (implying a 13-14x increase in CPMs) since the end of 2012. Desktop News Feed FBX ads began in May of this year and they are becoming more prevalent, but we would also expect them to extend into the Mobile News Feed in coming months, thereby increasing the relevance and quality ofmobile ads. Advertiser targeting should also improve going forward as Custom Audiences becomes easier to use. We are raising our Mobile and Desktop News Feed estimates going fonvard, and we project Mobile will surpass 50% of Facebook's ad revenue in 4Q13 and represent 60% of ad revenue in 2014. Mobile estimates in our bottom-up model increase to $2.96B in 2013 and $5.95B in 2014, up from $2.83B and $5.09B previously, increases of 3% and 12%. We remain positive on Facebook shares as user engagement remains strong with mobile more than offsetting desktop declines, and Facebook still early in its overall advertising trajectory. We reiterate our Overweight rating and are raising our price target from $44 to $53 based on the average of our DCF analysis ($56), 17x 2015E EBITDA ($56), and 33x 2015 non- GAAP EPS ($47). 2 EFTA01104690 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Adjusting Estimates Overall: We am raising our overall Facebook revenue, EBITDA, and EPS estimates as we are increasingly optimistic on Facebook's ability to monetize the News Feed, particularly in Mobile. Overall, our 2013 and 2014 estimates for revenue increase by 2-3% and EBITDA increases by 12%. See Figure I below for more details. Figure 1: J.P. Mor an's Revised Facebook Estimates FK•boolc 3013 NYE 4013491E 2913 JPIE 20144940E 2015 AIME itereseee Old Now On NIINI Old New Old Mow Old Now Odereslag Revenue 14293 1.762 1.852 1097 e469 6493 0430 ABM 11.161 12426 WV &oath at% 01.3% 469% 574% 616% 664% J61% 479% 26.4% 290% % ce7v5 de 5.5% 74% 3.1% 124% 14.9% MOS Revenue 601 842 996 1.091 2829 2961 5482 5,963 7.587 9.9)3 Y/Y09:591 4294% 453.6% 225,7% 2516% 502.5% 531714 WO% 1070% 490% 49.6% %Nevi 440 46% 9.5% 4.7% 199% 17.4% 0461.16.TolAIR.24 868 910 951 1.0% 3360 3432 3.738 3.945 3.575 3.923 WYGe401 49% -26% 45% 4.7% -3.5% 10% 21% 54% 44% .06% %569 vs 00 2.5% 52% 2.0% 55% 9.7% Deddte RI0MRail Rev NO 620 646 646 2001 2006 2269 2209 1.972 1.972 WI Growth -260% -268% -24.7% -243% -24.6% -24.6% -40 2% -142% 419% 439% %1900301 0.0% 0.0% 0.0% 00% 00% 044.4.7016444 Ned Rye 261 261 311 361 994 1.066 1ASO 1.667 IA00 1:162 1710.totiM 241.4% 2701% 027% MO% 200.9% 2869% 159% .56.5% wetc 47.0% %this oif 94% 160% 7,2% 14.3% 21.7% Payeenia Renews 2CCI 201 201 201 831 831 798 738 762 762 AY Ciente 154% 193% -21.4% 41.4% 2.6% 29,4 42% -92% 42% 42% % /419 vs de 00% 0,0% 0,0% 0.0% 00% TolaIRK4ain IASI 1.956 2.153 2.298 7.320 7524 9.610 101806 11.924 13.9$1. 7.70•916. 40.2% 64,9% 359% 410% 438% 479% 31.4% 420% 24.0% 27.2% %569 vs. 031 3.1% 6,7% 2.9% 11.1% 140% 40110.4 LOIS 1011 1.182 1.247 4.056 4.145 5.102 5.727 6.392 7433 Y4'00;41'. 494% 527% 234% 299% 394% 425% 25496 362% 251% 290% Mem rep SSA% 542% 549% 54.3% 564% SSIK 510% 53.8% 516% 540% % dun. al 24% 6.5% 2.2% 112% 147% PF EPS 5019 5020 5023 5024 50.74 50.76 5098 51.09 51.25 51.43 44.50torAh 58.5% 636% 339% 42.7% 380% 41.9% 322% 431% 27.6% 315% % <VW, al 3.1% 13,6% le% 11.9% 144% Source: J.P. Morgan estmates, Company data. Simplified Ad Formats and Broader Advertiser Base We think Facebook's efforts to simplify its ad formats have removed friction for marketers and helped create more News Feed-eligible ads, thereby spurring the advertising auction process. Beyond moving from 27 to 13 ad formats, the company recently announced it was standardizing image sizes for ads, making them consistent across all types of formats, across Desktop and Mobile. Faccbook has also increased the image sizes for its Page Post link ads on desktop which we think should drive higher click-through rates and engagement. We believe Facebook's advertiser base continues to widen and think advertisers in the Entertainment category have increased their Facebook ad spend in 3Q, likely due to the heavy summer movie season as well as advertisements around the fall TV lineup. Examples of entertainment advertisers in 3Q include ads for the movies Getanay and Lone Ranger, TV shows The Million Second Quiz and Masters ofSer, as well as Take Two's upcoming release of the console game Grand Theft Auto V. 3 EFTA01104691 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan We also expect Facebook's 4Q revenue growth to be bolstered by the retail vertical as we believe large retailers likely made significant strides in terms of measuring the ROI of their Facebook ad spend over the last year. Expect FBX To Drive Continued Yield Improvements On Desktop... Mobile Next? While Facebook has indicated that FBX represents a relatively small percentage of its ad revenue, we expect FBX to drive meaningful yield improvements — particularly on Desktop Right Rail — over time. We believe FBX remains relatively underpenetrated even among direct response advertisers and we expect additional advertiser adoption to drive yield increases as FBX ads offer higher ROI than many other direct response channels. According to Triggit, a Facebook Preferred Marketing Developer (PMD), FBX ads are currently adopted by just 9% of the Internet Retailer Top 500 sites and less than 7% of the top 10k Alexa sites. We note that Facebook currently requires PMDs (Preferred Marketing Developers) to individually approve clients for FBX ads and we expect further streamlining of its ad-buying process. Triggit data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Desktop News Feed and increased adoption of dynamic ads are driving a 27x increase in CTRs and a 50% decrease in eCPC (implying a 13-14x increase in CPMs) since the end of 2012. Note that FBX ads in the Desktop News Feed went live in early May 2013, after an initial test phase. We believe Facebook's Desktop Right Rail ads have CPMs of -$0.40 in the U.S though our checks suggest that industry CPMs for re-targeting are closer to -42.00, a significant gap that we believe FBX can help tighten over time as more advertisers shift to FBX and FBX ads increasingly appear in the News Feed going forward. Based on ow anecdotal checks, we believe FBX ads now represent the majority of Desktop Right Rail ads, up significantly over the last few quarters. We also believe FBX ads are becoming more prevalent in the Desktop News Feed with sites like Booking.com and other OTAs increasing their ad exposure in the Desktop News Feed. We believe Facebook is also working on adding Mobile News Feed ads into its exchange. Video Ads A Potential Upside Driver in 2014 We believe video ads can be a significant driver of growth for Facebook over time. According to eMarketer, digital video ad spend will reach $4.1B in 2013, up 41% Y/Y, and it will continue be one of the fastest growing segments of online advertising. While video ads already exist in both the desktop and mobile News Feeds, they are primarily click-to-play Page Post ads. Industry publications such as AdAge have suggested that Facebook is working with advertisers to launch auto-play video ads in the Desktop and Mobile News Feed for up to $1M-S2.4M per day. Advertiser demand for Facebook video ads appears to be strong, though the launch of auto-play video ads has seemingly been repeatedly delayed as Facebook ensures it has the necessary technology backbone in place to support higher-bandwidth video ads while maintaining the user experience on the site. We think it is critical that Facebook maintains the user experience, and recent delays do not change our view that video ads will drive increased demand and higher pricing. 4 EFTA01104692 Dou Amish North America Equity Research 12 September 2013 J.P.Morgan Revisiting Our Bottom-Up Advertising Build In this section, we walk through revised estimates in our bottom-up advertising build which is based on three segments: I) Mobile News Feed; 2) Desktop News Feed; and 3) Desktop Right Rail. While overall ad revenue remains key, we believe the bottom-up build is useful for capturing the ongoing mix-shift from web to mobile that generally results in fewer impressions, but higher overall eCPMs. 5 EFTA01104693 DOU Plineith NO7111 ArneriCa EquIty Research 12 September 2013 J.P.Morgan Figure 2: Facebook Bottom-Up Advertising Build $ In millions except per user ligures nMllnnt p14740rAm1 2011A 10124 20124 30124 24 2012A 10134 20134 138 38 20136 2011E 2015E Mobile Mt»Fe» Anyer WW' 339 480 51$ 574 642 566 rle 716 617 P32 nm 1.033 1231 VOIsUeartey 0.7 070 000 096 100 006 1.07 1.12 120 128 1.17 1.40 1.56 IneeeproMeNtice 000 017 055 100 083 166 1.18 125 130 120 1.35 1.42 7410 Mnnmorse» 0 72 200 642 241 801 »37 1271 1501 1.155 1953 2710 7440 Impreieions In Polo0 . 1222 27145 $9/7744 04354 72.077 94448 1182» 138.017 421.710 712.884 010.264 171, G.0,e, MA MA MA MA NM 5397% 324% 134% 377% 69% 39% GO Grme MA MA 1507% Im% 22% 37% 23% 18% 4121114 10» $648 55.52 55.18 1531 55.18 $4193 $720 8710 $7.02 24.35 »SO Y/Y Cm,» MA MA MA MA MA 1% 37% 53% 32% 19% 1» 00 Dux» MA M4 .20% .6% 0% 34% .1% 10% Renm36.346 103 1402 $027 $048 2024 2432 $024 $099 $121 5368 5579 17.23 Item; enengmem6441.47 (mtion4) 3050 3300 3366 33 66 3168 3971 $8.56 $15.13 $125e 32003 $26.75 2/2020,a, NM NM NM MA NM 1843% 186% 319% 245% 59% 44% 00•34,40 NM NM 500% 22% 28% 109% 42% 76% AniPerre11ktertree,6221m1b215) - 3049 3156 3332 81.26 »15 3718 39.15 111.85 38 11 31631 32439 Mo6114114»1444 Rciwo 190 $11.8 31520 33017 8.11Q1 33715 14512 36413 31.0091 3211011 »NU 38.103.4 Ire Greeä3 NM NM 454% 257% 531% 101% 50% oes Ase* 1133% 107% 22% 76% 28% 30% % of Total MReer» 1% 14% 23% 11% 30% 41% 48% en 44% 00% CO% giliialleffialg emene kWh 803 838 867 890 643 910 929 915 962 905 90) 1939 VeleNtertey 1 1.07 1.03 132 100 1.03 096 090 085 ere oer eeo ere koprossions,Vh41.13a 005 017 016 060 030 070 080 026 0.90 085 0.95 1.03 Total limecoMorciOst 44 145 310 534 257 612 UI 682 676 660 756 764 Total lopetalees In Pmtod 3981 13.168 29166 48.594 93309 55.037 81502 62.790 62.158 240947 276.101 278.803 Y/Y Gran» NM NM NM MA NM 363% 123% 28% 157% 15% 1% GO Gabe. NM NM 114% 73% IN 17% 3% .7% CIA 11.50 $1.75 »71 $1.50 1293 1136 1390 $4.50 1510 $4.42 58030 $7.08 Y/Y Ono» NM NM NM MA NM 123% 66% 66% 51% 39% /7% 00 Ortga. NM NM 55% 29% .411 16% 15% 29% ihmembieu 3001 $003 1009 10.19 1033 1020 tose $030 3037 31 14 31 86 St» Pes»»eng nnore090 Mim') 3050 3103 12.74 32 74 31 34 3386 3229 $525 3310 $598 $4.72 YeGrowle NM NM NM NM NM 671% 129% 103% 13% 93% 24% GO Gram M4 M4 100% 171% 40% 184% -47% 143% An Pone1Reeroodley (»Ions) - 3025 WM 3157 30 75 3205 3261 3307 eses $292 $454 33» 04•10.» Ne»14441Ulme» $4.0 3208 176.2 1670.1 12243 $184.4 $2372 12821 4140.5 $1/414 11,8548 11251.4 Y/Y Gen» NM 932% 271% 112% 287% 65% 18% GO Gretel 286% 237% 123% 8% 29% HM 28% % of To» 44 »nonoe 2% 7% 13% 6% 15% 15% 18% 17%. 18% II% 15% 2444141049 Fad Roveouo [Mobile • Cosklose 14.0 $34.9 $228.3 $475.7 8744.9 8557.9 1883.5 811243 81= 540248 1722412 110956.0 Y/7 Cm.» NM NM 292% 441% 89% 43% 00 Grtue. 484% 551% 106% 17% t'6% 26% 29% 04410op Re Rd Ase> 1.34.Us 690 203 836 867 »0 243 910 929 945 962 935 905 1.039 VOIsUrs.Day 1.04 1.07 103 1.02 1.00 1.03 096 090 026 0.78 087 080 070 IncreoproMCoce 64.) 36.9 ee2 61.9 77.8 64.5 79.7 83.0 830 850 832 75.0 750 Total »smeen:30e 43 119 50 506 SO 864 54.728 69269 56034 69.632 69.359 68250 63.810 64222 59.719 64.5» To4111»nneilons In Ptdod 15.738.369 4.596919 4428304 4980291 6.303.482 20.508.186 6.266286 6.484512 $278.1111 5.870.521 24300.805 21.797.414 1%914.303 171, Goa* 34% 13% 26% 44% 30% 36% 40% 26% 27% 42% -9% GO Mose 5% 7% 0% 27% 4% 3% .3% 4CPM $029 $0.19 $021 38.17 $0.14 $0.17 $0.11 $0.11 $0.10 $0.11 $0.11 WM $4,19 171, Cm.» 2% 5% -74% 41% -74% AM 47% 42% 49% -39% es otrerese. 42% 70% -77% -V% -79% -8% 10% ReernoMAU 357 2166 81.16 1039 1436 3.19 30.78 14.77) 14813 10.67 $283 9230 61.90 An Pono3174nonatOst tentkail 1804 3952 51032 $9,43 $938 9966 $763 57.73 $682 37.02 $730 5627 56.40 Desimp Reell 14741 Rommee 13,154.0 »KO $957.1 5857.7 54153.3 41534.1 8687.1 3705.5 $627.9 45.8, $29663 12288.7 11971.5 llY Cm.* 0 30% 234e 7% .744 12% -er% -264h -ze,4 44% 44% 00 Geem 404 71% -10% .1% 40% 3% .11% 3% %of Tolie4.4 Rian,r,Q 96% 79% 64% 83% 56% 44% 16% 31% 40% 23% IS% 74141 Desktop Rovonuo PCs Food 13.1540 »720 1960.2 1836.0 11.023.3 13.8009 $871.5 $843.4 3•10.5 11.005.3 31731.6 33.9493 139211 Y/Y »von 69% 37% 26% II% 9% 21% 0% .4% -3% -2% 0% 4% GGGnreh 6% 12% 6% I» .75% 8% .3% 17% %of741444 Roten., 100% 100% 99% 84% 77% 89% 70% 39% 62% 48% 93% 40% 31% Mex.-K*4MM $4.$0 11.00 im? 11.71. $1.15 2452 NM $122 1436 21.05 $393 33 96 3378 Wr Germ 7% 3% 4% 4% •113 -72% -13% 47% -8% -12% -1% .5% TOTAL ADVIERTSING meng, $Q477 727 873 8211 961 1.032 ep 1.(63 1.133 1.177 1.216 1.147 1222 1.482 11.40sUme,02y 1.31 1.15 1.37 1.46 1.49 142 1.51 1.51 1.55 136 1.53 1.70 1.78 IncrospoWv»Ver 45 43 40 39 46 42 43 42 99 35 40 26 22 rees lereent+0, PD32 43.119 50.549 51.027 Mim 70.452 56.232 71.044 72.769 70203 66.585 70.037 82.428 58.034 Wes meremmet In P44470 19738208 4900500 4943944 5.039024 6411.140 20.030.449 9394.000 11440.182 4.454.444 1079737 2591111.183 22714.299 21.113.372 WYCeem 34% 18% 27% 46% 31% »% 43% 28% 4% 24% 41% .7% 0126.6697 5% r% 8% 27% 0% 4% .3% 4% CM »29 »18 $021 $022 $021 *21 $0.19 $024 $027 $0.35 $028 14343 $4301 viffam..* 2% 9% 7% .4% 3% 3% 13% 26% 67% 27% 66% 39% 670 Ortete 42% 13% 1% -4% -0% 24% 13% 27% 70741.ADVIOITM110 REVENUE 33 1841 $072.0 1102.0 11006.0 113212 842799 11246.0 315010 11.7622 12.000 $41033 WM 9 »WM Y/Y Gros» 69% 41% 39% 43% 61% 61% 58% 56% 49% 30% 04.FX Y/Y Gros* 0% 39% 33% 43% 43% 0% 43% 63% 61% 58% 56% 4914 30% 00 Gabe. -9% 74% 9% 22% -6% 28% 10% 20% %44 Tee Ad Avenue 100% 100% 100% 100% 100% 100% 100% 100% 100% ICO% 100% 100% 103% Nonn Fades 4 % 44 %eiinecom 009% 032% 1.11% 1.66% 1% 13)0% 234% 2.78% 330% 2.50% 4.34% sm Noe4 4405 /Os % olcoloi »inlna> 07% 15% 210% 358% 17.4%. 448% 559% 612% 692% 002% 76.9% 246% Source: Stelpany regle and J.P. Magen estimtet 6 EFTA01104694 Dom Anmuth North America Equity Research 12 September 2013 J.P.Morgan As shown in Figure 3 below, we expect Facebook to continue to benefit from overall user (MAUs) and engagement (visits/user/day) growth as mobile drives users and frequency of visits. Impressions per visit and overall impression volume is likely to come down, but we expect higher eCPMs on mobile and improving yield on desktop to more than offset the negative impacts of declining overall impressions in 2014 and 2015. We think further upside to our estimates could come from: 1) increases in mobile and ad load in overseas markets; 2) if the Facebook Exchange and other new targeting tools drive a rebound in Desktop Right Rail CPMs and stabilize Desktop revenue; and 3) video ads. Figure 3: Facebook Total Ad Revenue Growth Drivers In millions except per user Fig res on iniOnS eit:CI print Ism) 2061* 1012A 2012A 30121 40124 2012.4 1013.1 2013/1 3013E 4013E 2013E 2014E 2016E TOTAL AtivER119003 %Yew/4109% 727 673 928 961 1.002 951 1.083 1.1$) tor 1,216 1.147 1.322 1.462 11919t190.04/ 131 135 137 145 1.49 1.42 1.51 151 1.55 1 56 153 1,70 1.78 orninevo-nMs/11.1x4 46 49 40 39 46 42 43 42 39 35 40 26 22 TOW lenreseatn141Y/ 43,119 50.549 51.027 55.341 70.452 56432 71.044 72.769 70.203 55.92,6 70.037 82.426 56034 Taal Impressions In Pitied 19718.389 4400.030 4.643.484 5036.036 9411.140 20490949 6.394.000 6.640.162 6.451.664 6.070.717 25.563.581 22784399 21.182.387 WY Groom 34% 15% 27% 46% If% 3916 43% 28% .5% 2" -II% 00 Crony, 9% 7% 2714 CPU $0.20 10.19 10.21 $022 3921 3021 0.19 30.24 10.27 US$ 30.21 10.43 50.11 Y/Y &Clan 2% ne . 3% 3% 13% 26% 67% 27% 66% 30% OO otos* .72% 73% /14 -6% 24% 13% 27% TOTAL ADVIRT00401139311113 03.114.0 01721 33.0 11416.0 11329,0 34,2794. $4245.0 31.0091 $1.7612.2 $2406.1 10.103.1 0.017.9 112.924% Y/YG/0“Th 60% 37% 28% 36% 4 7% 36% 43% 67% 67% 58% 55% 46% 36% er4X WY 670.1111 0% 18% 33% 43% 43% 0% 4% 61% 61% 58% 56% 46% 30% 00 0A.411 -47% 14% 9% 22% -1/6 20% KS 20% % of Taal la0 Revalue 100% 100% 100% 100% 100% 1131% 100% 1120% 100% 100% 100% 100% 1060% New Feed 44 0% 011:0311moreamons 000% 0.32% 1.11% 1,58% 1% 1.99% 231% t78% 33)% 2.59% 4.34% 510% New Fee 48 a % elms1124..eflue 0.1% 3.5% 210% 36.0%. 17.4% 441% 559% 64.2% 692%, 60.7%. 76.9% 44.0% Source: Company reports and JP. Morgan ashrams. Facebook posted strongly accelerating ad revenue growth in 2Q 13, driven primarily by mobile ads. While increasing Facebook's overall share of ad budgets across both desktop and mobile is critical, we expect mobile to remain the primary focus. Facebook also sometimes has discretion around directing certain campaigns across formats, and we believe the highest quality ads and especially those that point to strong mobile sites will be pushed toward the Mobile News Feed. Mobile benefiting from several growth drivers As shown in Figure 4 below, we expect Mobile to surpass Desktop ad revenue in 4Q13. We remain optimistic on Mobile ad formats including Sponsored Stories, Promoted Posts, App-Install Ads, and others as Mobile ads have higher CFRs and significantly higher eCPMs relative to Desktop. 7 EFTA01104695 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 4: Facebook Ad Revenue by Format S in millions 18.000 16.000 14.000 12.000 10.000 8,0:0 6,000 4,000 2,000 2011A 2012A 2013E 2014E 2015E 2016E • Mobile News Feed • Desktop News Feed •Desktop Right Ral Source: Company reports and J.P. Morgan emmates As shown in Figure 5 below, we expect mobile to continue witnessing very strong growth driven by increases in users, visit frequency, and ad load (impressions per user visit). We believe newer ad formats have been adopted more quickly by U.S. advertisers but international mobile ad load should increase over time. The mix-shift toward international markets such as Asia and Rest Of World could drive lower overall mobile eCPMs, but also greater impression volume. Figure 5: Facebook Mobile Ad Revenue Build $ In millions except per user figures n %tons ewes. peruser Igures) 20114 1012A 24312A 3011A 44312A 2012A 1013A 9313/1 30131 40131 2013E 20149 20151 1/41910 118.49 End mouse.raw 330 490 616 574 642 566 716 716 847 032 804 1.033 1231 Wstalso0Day 0.7 020 080 O.% 1.00 026 1.07 1.12 1.20 128 1.17 1.40 136 InreevonsMs41)444 040 0.17 0.56 1.00 0.61 1.05 1.18 1.2$ IS 1.20 1.95 142 Tc441000u6aprevosi 0 72 330 142 241 801 1037 1271 1501 1.156 1963 2710 mut Imeamslem Weeded • 1,722 27.568 Woe' 88.364 72.077 94.668 110908 138187 421.710 712284 949254 WY Groom MI MA NM MA MA 6397% 324% 131% 311% 69% 39% 00 Won* NM MA 1501% 114% 226 31% 23% 18% 4061 $0.011 14.08 08.52 $110 95.31 Sill %AO 57.20 V% 37.02 *35 %.00 MG/94M MA MA NM MA MA 1% 31% 53% 32% IP% 8% OO Gros* MI MA .6% 0% 34% 4% 10% RikenualAAU 14.03 50.02 3022 50.48 3054 50.52 5014 5099 $121 1.3.64 55.76 5723 Pe001400094/499410w1m1104/11 $060 040 3305 4360 44.06 59.71 %41.1 815.13. $12.58 42003 928.75 WY &clan Me MA NM MA NIA 1643% 196% 315% 245% 59% 44% 004406" MA MA 590% 22% 26% 109% 42% 76% 1515.585113ener5053(.41ons) - 50.49 41.65 sao2 Si28 $4.15 47.18 5815 411% *II 41691 $24.30 1.01416 114/619903 Review* 50.6 $11.8 $152.0 $305.7 5469.6 6373.5 5665.4 5841.7 51110.6 52661.5 16.952.6 58.983A WY Groom flu MI 45" 2.57% 631% 101% 60% OO Grower 1193% 101% 22% 76% 28% 30% % 91704 40 Reveroe 1% 14% 2 11% 30% 41% 48% 6216 44% 60% 60% Source: Company reports and JP. Morgan estimates. Desktop yields should improve over time We expect Facebook's desktop ad revenue to continue facing headwinds as users shift their usage towards mobile. While desktop users are likely to continue growing, we think a greater proportion of each user's Facebook usage is likely to shift toward mobile, resulting in declining desktop engagement metrics such as visits/user or minutes/user. We expect Facebook's desktop impressions to decline beginning in 2014 as increasing adoption of Desktop News Feed ads is more than offset by declining usage of Facebook on the desktop. However, we are more optimistic on improvements in desktop yield or eCPM as: 1) Facebook improves targeting capability; 2) third-party data through FBX and Custom Audiences pushes Facebook further down the purchase funnel, driving higher ROI and ad spend; and 3) social 8 EFTA01104696 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan still represents a small fraction ofmost advertiser budgets. Our checks suggest that advertisers such as Zappos are having success with Desktop Right Rail ads at low CPMs. We note that improvements in desktop yield in more mature markets may be somewhat offset by impression growth in lower eCPM developing markets and as a result our overall Desktop Right Rail eCPMs are essentially down for the next few years. Higher yield through FBX and Custom Audiences could make our numbers conservative. Figure 6: Facebook's Desktop Advertising Revenue (News Feed and Right Rail) inta2= n inso 6 0 440 2011A 1012A 2012A 30121 4012A 20121 1013.3 20138 1013E 30138 2013E 20149 20159 50096 /450 803 836 867 860 843 910 929 915 962 935 SOS 1.030 8,601.80.170 1.04 107 1.03 102 1.00 1.0) 0.96 0.90 085 0.76 eer 0.80 0.70 Inc700-0M0Veer 0.05 0.17 035 0.80 0.30 0.70 0.60 0.85 0.90 0.05 0.95 106 181010-00040$014 44 145 310 634 257 612 569 02 676 OW 756 794 10.01000046sInPwlad 3901 13,100 2010 40504 93.900 56,037 $1102 10,700 0,151 2•007 27%101 270100 WY Gn:80, Mg MA NM MA NM 363% 123% 28% 157% 0% 1% 00 Coont 'IA MA 04% 73% 73% 11% 3% .7% •CP18 3110 31.75 32.71 $3.50 $2.93 0335 $3.10 $4.50 St* Ma WOO $7.00 19Y Grown MA MA NO MA NM 12.3% 66% 46% 51% 36% 17% 00000 MI MA 55% 29% 4% 0% 0)6 29% Re 00.179) $0.01 $003 $0.09 $019 $033 $020 1026 $030 $037 $1.14 $1.86 $1 a Period 448000001ley Imlionll $050 $1.00 074 $2.74 $1.36 $371) $229 $355 0.10 $6.96 $472 Y/Y &clan MI MA NM MA NM 671% 129% 103% 13% 93% -21% 00074041 AM MA 100% 174% .60% 184% 41% 143% Inv 054:0 Renen950,0 94418, 0 - $0.25 WM $1.07 $0.75 32.05 $2.61 Sser $310 $2.92 $4.54 $535 00008 Nan Feed Revenue KO Me $702 $170.1 32751 51$4.4 $2771 MAI $3603 $1.016.4 35,650,6 0,951.6 19Y Grolom NM 932% 271% 112% 257% 55% 75% 00 0.080 310% 237% 723% 6% 29% 19% 28% % 01840041R4544uo 2% 7% 13% 6% 15% 15% 16% 1714, 16% 17% 15% Taal Nom prod Revemar (14,0•10 4 0.583pl HO 334.0 3220.3 $47.7 $744.9 057.9 $8033 35,124.3 $14312 $4.026.8 37.00.2 3101510 WY Grown MIA NM 392% 205% 441% 69% 43% 00 00/.03 48/31 554% 100% 77% 60% 20 29% 0•1811op R19018211 A3*00901.1A1.71 $93 803 836 867 880 613 910 929 5135 962 935 595 1.039 154.55 440.0 1.04 107 1.03 1.02 1.00 1.03 0.95 0.90 0.85 0.78 087 080 070 100/4001030$1112ve 64.5 589 592 61.9 771 64.5 797 83,0 85.0 85,0 832 75.0 700 Tag Imweisio,003, 41119 50.506 50.861 51.728 69269 58034 69.632 69.359 68250 61810 68.222 59.719 54.560 Teo Impres8040 In 3,001 15.73330 406319 4.00.594 4.080.201 0303.482 20.508.386 6.20886 6.484.512 8.270.9116 5370.521 2410885 21397.414 19314.303 wY Groom 34% 17% 26% 44% 30% 36% 40% 26% 21% .12% 00 0.680 5% I% 8% 27% .3% -7% 0914 $.20 $0.111 feat $0.17 014 0.17 80.11 $0.11 0.19 30.11 UM 011 *so WY Grown 2% 5% .14% 47% 44% NM 47% 42% .19% .8% 000,0.» -72% 10% -17% -27% 1916 .7% 4% 101 17603t7$01.1.12 $4.57 $148 $1.15 3039 9196 $4.19 50,76 076 9166 $087 $2.85 $2.30 $190 /00 170000 176030091)0y (011003) MU $9.52 51052 1943 5938 $966 $7.63 $7/3 96.82 1702 3/30 *27 3540 0010 Right RaN Revenue 33,154.0 11681 $057.1 8107.7 $10.3 58536.1 5647.1 MIA $07.9 $8450 $2.603 $2,286.7 $1,1713 YtY Grown 698 36% 23% 7% 40% 12% .21% .26% .27% .21% .29% .104 44% 000700 4% 0% 40% -7% .79% 3% -11% 3% % cd Tam.010.6460 SO% 79% 641% 53% 55% 44% 36% 31% 40% 23% 15% Source: company reParts.JP lAorgan estimates. Investment Thesis, Valuation and Risks Facebook (Overweight: Price Target: $53.00) 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 EFTA01104697 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan toward more social ads with higher-quality formats, and it will become increasingly valuable to advertisers. Valuation $53 Price Target. Our 2014 December year-end price target of $53 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 $56 price per share and employs an 11% WACC and 3% long term growth rate. We expect Facebook to generate $32.16B in revenue in 2020 with a 54.2% EBITDA margin. Our EV/EBITDA valuation results in a $56 price per share and employs a 17x target EV/EBITDA multiple on our 2015 EBITDA of $7.33B. We note that our I 7x 2015E EBITDA target multiple is at a discount to its high-growth industry peers such as Netflix (25.5x) and TripAdvisor (18x) but at a premium to other online advertising peers such as Google (7x). Our PIE valuation results in a $47 price per share and employs a 33x P/E multiple on our 2015 PF EPS estimate of $1.43, which is below Facebook's 39%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. 10 EFTA01104698 Doll Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 7: Facebook Income Statement 20114 10124 20124 3O12A 40124 2012A 10134 20134 3013E 4013E 2013E 2014E Revenue 3,711 1,058 1,184 1,262 1,585 5,089 1,458 1,813 1,955 2,298 7,524 10,686 Cost of Revenue 851 273 295 317 387 1.272 404 454 489 563 1.910 2.682 Gross ProM 2,860 785 889 945 1,198 3,817 1,054 1,359 1,466 1,735 5,614 8.004 Operating Expenses Marketing and Sales 383 136 135 149 162 582 175 235 260 306 976 1.389 Research and Developmen: 273 93 112 142 157 504 165 186 225 257 833 1.261 General and Administrative 225 72 127 129 143 471 151 144 156 177 628 876 Stock-based Compensation 217 103 1.106 179 184 1,572 170 224 235 276 900 962 Payroll Tax Related to SSC 6 152 (31) 29 150 20 8 Total Operating Expenses 1.104 404 1.632 568 675 3279 681 797 876 1.016 3.342 4.488 Operating Income 1.756 381 (743) 377 523 538 373 562 590 719 2,273 3,516 PF Operating Income 1,979 484 515 525 736 2,260 563 794 825 995 3,177 4,477 Other name (expense). ne' (61) 1 (22) (5) (18) (44) (20) (17) 0 21 (16) 103 Pre-tax Income 1.695 382 (765) 372 505 494 353 545 590 741 2,257 3,618 Income Taxes 695 177 (608) 431 441 441 134 212 260 326 932 1.520 Effective Tax Rate 41% 46% N/A 116% 87% 89% 38% 39% 44% 44% 41% 42% GAM Net Income 1.000 205 (157) (59) 64 53 219 331 331 415 1,325 2.099 GAAP EPS 50.43 50.09 (50.08) ($0.02) $0.03 $0.02 $0.09 543.13 50.13 $0.16 $0.53 $0.82 Diluted Shares Out 2332 2.361 2.451 2.579 2.506 2.474 2.499 2.502 2.511 2.515 2.507 1557 Non-GAAP Pre-tax Income 1,918 485 493 520 718 2.216 543 777 825 1,016 3,161 4,580 Income Taxes 732 192 198 209 292 891 231 289 330 407 1.257 1.786 Effective Tax Rale 38% 00% 40% 40% 41% 00% 43% 37% 40% 40% 40% 39% Nona3AAP Net Income 1,186 203 296 311 426 1.325 312 488 495 610 1,905 2,794 Non414AP EPS $0.51 50.12 50.12 50.12 50.17 50.54 50.12 50.19 50.20 50.24 50.76 51.09 EBITDA Calculation Operating Income 1.756 381 (743) 377 523 538 373 562 590 719 2.273 3.516 Stock-based compensation 217 103 1.106 179 180 1.572 170 224 235 276 900 962 Payroll Tax Related to SBC 6 152 (31) 29 150 20 8 Depreciation and Amortization 323 110 139 176 224 649 241 230 246 252 968 1.250 EBITDA 2,302 594 654 701 960 2,909 804 1,024 1,071 1,247 4,115_ 5,727 20114 10124 20124 30124 40124 20124 10134 20134 3013E 4013E 2013E 2014E TA, Growth Revenue 88% 45% 32% 32% 40% 37% 38% 53% 55% 45% 48% 42% Cosi olRevenue 73% 63% 43% 34% 59% 49% 48% 54% 54% 45% 50% 40% Gross Profit 93% 39% 29% 31% 35% 33% 34% S3% 55% 45% 47% 43% Marketing and Sales 110% 100% 48% 38% 40% 52% 29% 74% 75% 89% 68% 42% Research and Oevelopmen: 102% 75% 78% 89% 97% 85% 77% 66% 58% 64% 65% 51% General and AcVninislrative 101% 50% 123% 139% 120% 109% 110% 13% 21% 24% 33% 39% Stock-based Compensation 985% 1371% 1628% 156% 142% 624% 65% -80% 31% 50% -42% 6% Total Operatng Expenses 146% 130% 481% 85% 99% 197% 69% -51% 54% 50% 2% 34% Total Operating Expenses (Ex4BC) 88% 71% 60% 57% 67% 63% 56% 52% 53% 53% 54% 43% Operating Income 70% -2% -283% -9% -5% -69% -2% NM 57% 38% 322% 55% PF Operating Income 88% 23% 8% 8% 18% 14% 16% 54% 57% 35% 41% 41% GAAP Net Income 65% -12% -165% -139% -79% -95% 7% NM NM 548% NM 58% GAAP EPS -13% -179% -125% -80% -95% 1% NM NM 546% NM 55% Non-GAAP EPS 20% -1% 4% 2% 5% 1% 62% 63% 43% 42% 44% EBITDA 93% 33% 19% 21% 32% 26% 35% 57% 53% 30% 43% 38% Cla2 Growth Revenue -6% 12% 7% 26% -8% 24% 8% 18% Operating Income -30% -295% -151% 39% -29% 51% 5% 22% PF Operating Income -22% 6% 2% 40% -24% 41% 4% 21% EBITDA -18% 10% 7% 37% -16% 27% 5% 16% % of Revenue Cost 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% 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% Marketing and Sales 10.3% 119% 11.4% 11.8% 10.2% 11.4% 12.0% 13.0% 13.3% 13.3% 13.0% 13.0% 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% 11.8% General end Adenintstrative 6.1% 6.8% 10.7% 10.2% 9.0% 9.3% 10.4% 7.9% 8.0% 7.7% 8.4% 8.2% Stock-based Compensation 5.8% 9.7% 93.4% 14.2% 11.6% 30.9% 11.7% 12.4% 12.0% 12.0% 12.0% 9.0% Operating Income 47.3% 36.0% 42.8% 29.9% 33.0% 10.6% 25.6% 31.0% 30.2% 31.3% 30.2% 32.9% PF Operating Income 53.3% 45.7% 43.5% 41.6% 46.4% 44.4% 38.6% 43.8% 42.2% 43.3% 42.2% 41.9% EBITDA 62.0% 56.1% 55.2% 55.5% 60.6% 57.2% 55.1% 56.5% 54.8% 54.3% 55.1% 53.6% Source: J.P. Morgan esamsles. Company data. 11 EFTA01104699 Doug Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 8: Facebook Revenue Segment Summary 2011A 1Q12A 2Q12A 3O12A 4012A 2012A 1Q13A 2O13A 3013E 4013E 2013E 2014E 2015E • ummary Advertising 3.154 672 992 1.08E 1.329 4,279 1.245 1.599 1.752 2.097 6.693 9.898 12.826 Y/Y Growth 69% 37% 28% 35% 41% 36% 43% 61% 68% 58% 56% 46% 30-!:, Ex-FX Revenue (YM 38% 33% 43% 43% 43% 63% 0/0 Growth -8% 14% 9% 22% -6% 28% 10% 20% % of Total Revenues 85% 82% 81% 86% 84% 81% 85% 88% 90% 91% 89% 93% 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% 0/0 Growth -1% 3% -8% 45% -17% 0% -5% -1% % of Total Revenues 15% 18% 16% 14% 16% 16% 15% 12% 10% 9% 11% 7% 6% Total Revenue 3.711 1,058 1.184 1.262 1.585 5,089 1.458 1,813 1,955 2.298 7,524 10.686 13.589 WY Growth 88% 45% 32% 32% 40% 37% 38% 53% 55% 45% 48% 42% 27% FX Impact (11) (36) (57) (23) Ex-FX Revenue 09Y) 3.681 1.069 1.220 1.319 1.608 5216 WY Growth (Ex-FX) 86% 46% 36% 38% 42% 41% O/0 Growth -6% 12% 7% 26% -8% 24% 8% 18% Seasonality 21% 23% 25% 31% 19% 24% 26% 31% US & Canada $11.50 $2.90 $3.20 $340 $4.08 $13.61 $3.50 $4.32 $4.24 $4.83 $16.95 $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 $058 $0.69 $2.37 $0.64 $0.75 $0.78 $0.76 $2.96 $3.39 $3.86 Rest of World SI 56 $0.37 $0.44 $0.47 $0.56 $1.88 $0.50 $0.63 $0.96 $1.34 $3.54 $6.68 $8.03 Total 55.11 $1.21 $1.28 $1.29 $1.54 $5.35 $1.35 $1.60 $1.68 $1.89 $6.56 $8.09 $9.17 WY Growth US & Canada 33% 17% 13% 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% 11% 3% 22% 14% 21% 36% 36% 11% 25% 14% 14% Rest of Woad 468% 18% 13% 18% 38% 21% 36% 44% 106% 138% 89% 88% 20% Total 25% 7% 1% 4% 12% 5% 11% 25% 29% 23% 23% 23% 13% CVO Growth US & Canada -9% 10% 6% 20% -14% 23% -2% 14% Europe -13% 2% -4% 25% -7% 17% -2% 9% Asia -6% 4% 5% 19% -7% 18% 4% -3% Rest of World -9% 19% 6% 21% -11% 26% 52% 40% Total -12% 5% 1X 19% -12% 19% 4% 14% Geographic 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 3.090 Asia 363 118 135 154 198 605 197 247 271 280 998 1.397 1.863 Rest of World 278 87 113 130 167 497 159 213 342 503 1217 2.813 3.987 Total 3.711 1,058 1.184 1.262 1,585 5.089 1.458 1,813 1,955 2,298 7,524 10.686 13.589 % of Total US & Canada 52% 50% 50% 50% 49% 50% 47% 47% 43% 42% 44% 37% 34% Europe 31% 31% 29% 27% 28% 29% 29% 28% 26% 24% 26% 24% 23% Asia 10% 11% 11% 12% 12% 12% 11% 11% 14% 12% 13% 13% 14% Rest of World 8% 8% 10% 10% 11% 10% 11% 12% 17% 22% 16% 26% 29% Total 100% 100% 103% 100% 100% 100% 103% 100% 100% 100% 103% 100% 100% WY 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% 163% 201% 145% 131% 42% Total 95% 45% 32% 32% 40% 37% 38% 53% 55% 45% 48% 42% 27% Source: J.P. Morgan eserreles. Company data. 12 EFTA01104700 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 9: Facebook Revenue Driver - Advertising 2011A 1012A 2012A 3012A 4012A 2012A 1013A 2013A 3013E 4013E 2013E 2014E 2015E 10031 Summa Global Advertising Advertising Impressions (in billions) 18500 0.600 4,643 5.038 6,411 20,691 6.394 6.640 6.459 6.071 25.564 22.786 21.182 V7Y &Nona 41% 35% 18% 27% 46% 33% 39% 43% 28% -5% 24% -11% -7% WO Growth 5% 1% 8% 27% 0% 4% -3% -6% Average Cost Per Thousand (CPM) $020 $0.19 $021 $0.22 $0.21 $0.2t $0.19 $024 $0.27 $0.35 $0.26 30.43 $0.61 WY Growth 20% 1% 9% 7% -4% 4% 3% 13% 28% 67% 27% 66% 39% WO Growth -12% 13% 1% -4% -6% 24% 13% 27% Global Advertising Revenue 3.154 872 992 1.086 1,329 4279 1.245 1,599 1,752 2,097 6,693 9,698 12,826 V/Y &one 69% 37% 28% 36% 41% 36% 43% 61% 61% 58% 56% 48% 30% WO Growth -8% 14% 9% 22% -6% 28% 10% 20% MO US & Canada 1 Advertising impressions On billions) 4.455 1.200 1.103 1212 1.337 4.852 1.265 1,169 1,175 1,283 4.893 4.697 4.509 Y/Y Growth 8% -2% 14% 16% 9% 5% 6% -3% -4% 1% -4% -4% 0/C? Growth 4% -8% 10% 10% -S% -8% 1% 9% Average Cost Per Thousand (CPM) $0.36 $0.35 $0.43 $0.44 $0.47 SO 30.44 $0.62 $0.63 $0.67 $0.59 $0.77 $0.96 Y/Y Gone 16% 24% 20% 15% 20% 25% 42% 42% 43% 38% 30% 25% 0 1Q Growth -13% 24% 2% 6% -8% 41% 2% 7% US & Canada Advertising Revenue 1.583 419 479 538 631 2,067 552 721 741 866 2,880 3,595 4,314 WY Growth 48% 26% 22% 36% 37% 31% 32% 51% 38% 37% 39% 25% 20% % of Torsi Adverasuv Revenue 50% 48% 48% 50% 47% 48% 44% 45% 42% 41% 43% 36% 34% Europe Advertising Impressions (in billions) 5.549 1.800 1.715 1.638 2.045 7.1 2.341 2.326 2.162 2,250 9,080 9.535 9.535 Y/Y Growth 40% 26% 27% 27% 30% 30% 36% 32% 10% 26% 5% 0% 0/Q Growth 12% -5% -S56 25% 14% -1% -7% 4% Average Cost Per Thousand (CPM) 30 '8 $0.15 $0.17 30.18 30.18 $0.17 $0.16 30.19 $0.20 $022 $0.19 $0.24 30.30 WY Growth -5% ,5% -S% -4% -5% 3% 13% 13% 20% 12% 25% 25% O/C/Growth -20% 13% 5% 2% -14% 24% 5% 8% Europe Advertising Revenue 1.002 274 294 295 374 1,237 367 451 440 494 1,752 2,299 2,874 Y/Y Growth 81% 33% 20% 20% 22% 23% 34% 53% 49% 32% 42% 31% 25% % of TOW Advertising Revenue 32% 31% 30% 27% 28% 29% 29% 28% 25% 24% 26% 23% 22% Asia Advertising Impressions (in billions) 2.646 650 841 953 1.315 3.7 939 1.219 1.287 1,361 4,826 5.309 5,734 WY Growth 28% 25% 30% 80% 42% 45% 45% 35% 5% 28% 10% 8% 0/O Growth -11% 29% 13% 38% -29% 30% 6% 7% Average Cost Per Thousand (GPM) $0.12 $0.15 $0.14 30.14 $0.13 $0.14 $0.19 30.16 $0.20 30.19 $0.19 $0.24 30.30 Y/Y Growth 38% 24% 16% -2% 17% 23% 35% 40% 45% 37% 28% 25% Ci/O Growth 17% -10% 2% -6% 47% -1% 6% -5% Aida Advertising Revenue 313 99 115 133 168 51 176 225 251 256 908 1,279 1,726 Y/Y Growth 119% 77% 55% 5f% 77% 65% 78% 96% 89% 52% 76% 41% 35% % of Total Advertising Revenue 10% 11% 12% 12% 13% 12% 14% 14% 14% 12% 14% 13% 13% Rest of World Advertising Impressions (in billions) 3.089 950 984 1233 1.714 4.681 1.849 1.924 1.835 1.156 6.764 3.246 1.405 Y/Y Growth 77% 25% If% 93% 58% 95% 95% 49% -33% 39% -52% -57% 0/0 Growth 7% 4% 25% 39% 8% 4% -5% -37% Average Cost Per Thousand (CPM) $0.08 $0.08 $0.11 30.10 $0.09 SO $0.08 $0.10 $0.17 $0.42 $0.17 $0.84 $2.79 IVY &theft? 5% 32% 22% 1% 14% -4% -1% 79% 357% 81% 393% 232% 0/0 Growth -6% 25% -6% -6% -11% 29% 66% 139% ROW Advertising Revenue 256 80 104 120 156 460 150 202 320 481 1,153 2,726 3,913 WY Growth 934% 86% 65% 77% 95% 80% 88% 94% 166% 208% 151% 136% 44% % of TOM! Advert/sus: Revenue 8% 9% 10% 11% 12% 11% 12% 13% 18% 23% 17% 28% 31% Source: J.P. Morgan a:Armies. Company data. 13 EFTA01104701 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 10: Facebook Revenue Drivers - Payments and Other Fees 2011A 1012A 2 12A 3012* 4012* 2012A 1013A 2013* 3013E 4013E 2013E 2014 9 UMM 040061Payments an0 Other Nee Total Payments and Other Fees 557 186 192 176 256 810 213 214 203 201 631 786 762 WY Growth 425% 98% 61% 73% 36% 45% 15% 11% 15% .21% 3% .5% -3% CPO &oath .1% 3% 4% 45% -17% 0% .5% -1% 0.96 Revenue per Avg. DAV 51.38 50.37 $0.34 3031 5043 51.47 5033 30.31 $0.21 3027 $1.20 51.00 50.88 WYGroosa 232% 37% 16% .13% 6% 7% -10% -12% -9% -37% -19% -77% .12% 0/0 Growl, -8% -3% -13% 37% -22% -5% -10% -5% Revenue Per Avg. MAU IAPJP1); 50.77 3021 5021 30.15 $025 30.85 5020 30.19 50.17 30.17 50.72 50.60 30.51 VP/ GroorA 250% 46% 23% -12% 9% 11% .8% .9% .4% 33% .15% 48% .14% 0 10 G,Owth .7% .314 . 13% 1R' -21% -4% .914 -414 201121 101721 2012A 3012A 4012A 7012A 101321 20134 3011E 4013E 2013E 2014E 2015E FteMbook Payments Revenue From Zynge (30% lake: 436 120 103 SS 151 462 75 57 57 62 251 225 210 VP/Grove-1i 35% .6% -24% 23% .9% -3314 45% -35% -59% 46% •70% -6% GOO Growth -2% -14% -15% 72% -50% -25% 1% 9% % 01813 PA)ThOIX4 RO•totrO NA 64% 54% 50% 59% 57% 35% 26% 28% 31% 30% 29% 28% % of FB Total Revenue NA I I% 9% 7% 10% 9% 6% 3% 3% 3% 3% 2% 2% Other Peyrnen% Ftevinue (excl. Zynge: 121 69 59 SI 105 348 136 157 14$ 139 580 563 552 WYGrossa N.4 NA 720% 105% 189% 709% 78% 65% 32% 87% -3% -2% OA) GrOWM 0% 34% 0% IP% 31% Id% -7% -5% % 01FB Pay0W44 116,10o0 NA 36% 46% 50% 41% 43% 65% 74% 72% 69% 70% 71% 72% Total IMeebook Payments Revenue (Bottom-up 587 166 192 176 266 210 213 214 203 201 631 761 762 WY Grote", 425% 98% 61% 13% 36% 45% 15% 11% 15% -21% 3% -5% -3% Grown -1% 3% -8% 45% -17% 0% .5% -1% Source: J.P. Worgan estimates. Company data. 14 EFTA01104702 OOw Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 11: Facebook User Metrics B Region 2011A 1012A 20124 3012A 4012A 2012A 1013A 2013A 3413E 40113E 2013E 2014E 2015E Monthly Active U8.10 (MAU) uS 6 Canaria 179 183 188 189 193 193 195 198 199 200 204 207 Europe 229 239 246 253 261 261 269 272 276 27 279 293 302 Asra 212 234 256 277 298 299 319 339 359 37 375 449 511 neseerwcoa 225 245 268 288 301 304 327 346 366 38 383 460 533 Total 1345 901 955 1.007 1.056 1.091 1.110 1,155 1,199 1.2 1.238 1,400 In YetAkcadb us & Canada re% 12% 10% 7% 8% 8% 7% 6% 5% 4% 4% 2% 1% Europe 25% 19% 16% 14% 14% 14% 13% If% 9% 7% 7% 5% 3% Asia 54% 50% 47% 41% 41% 41% 36% 33% 30% 26% 26% 20% 15% Rest or Woad 69% 53% 46% 39% 35% 35% 33% 29% 27% 26% 26% 20% 16% Told 39% 33% 29% 26% 25% 25% 23% 21% 19% 17% 17% 14% 11% Cauca:ats US.S Canada 21% 20% 19% 19% 18% 18% 18% 17% 17% 16% 78% 15% 13% Europe 27% 27% 26% 25% 25% 25% 24% 24% 23% 23% 23% 21% 19% Area 25% 26% 27% 28% 28% 28% 29% 29% 30% 30% 30% 22% 23% Rea Or Wed 27% 27% 28% 29% 29% 29% 29% 30% 31% 31% 31% 33% 34% row 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Motidle MAU 432 488 643 604 660 680 711 819 876 92 928 1.138 1.324 WY Grimm 76% 69% 67% 61% 57% 57% 54% 51% 45% 37% 37% 23% 16% OO Grimm 12% 11% 11% 13% 10% 9% 7% 6% % Mum MAUS 51% 54% 67% 80% 64% 64% 88% 71% 73% 75 75% 81% IS% Mottle.Only MAU 56 83 102 126 157 157 189 219 248 266 387 499 WY Matte 287% 277% 240% 215% ill% 71% 128% 115% 96% 69% 69% 45% 29% 00 Stettin 43% 23% 24% 25% 20% 16% 12% 8% % dkla MAU* 7% 9% 11% 13% 15% 15% 17% 19% 21% 2 . 22% 28% 32% W4b end Mall MAU 374 405 441 476 523 5Z) 542 600 630 642 662 752 826 19Y Grime 63% 52% 49% 42% 40% 40% 39% 36% 22% 27% 27% II% 10% Gramm 8% 9% 8% 9% 7% 7% 5% 5% %dM19i MA1.4 44% 45% 46% 47% 50% 50% 51% 52% 53% 54 54% 54% 53% Web MAU 747 818 853 881 899 899 921 93. 953 972 972 1,019 1,059 YrY Geeate 33% 24% 20% 16% 74% /4% 13% 0% 8% 8% 8% 5% 4% OO Grow* 4% 4% 3% 2% 2% 2% 2% 2% % «Mai MALS 93% 91% 89% 67% 85% 85% 63% 81% 80% 7 79% 73% 68% Web Orly MAU 413 413 412 403 376 374 359 334 324 309 267 234 Geowfrr 14% 5% 0% -5% -9% -9% -13% -18% -20% -18% -18% -14% -12% 00 Omni* 0% 0% -2% .7% -5% -8% .4% -4% % Mum MAUS 499E 46% 43% 40% 38% 16% 32% 29% 27% 26 25% 19% 16% OHM Active Vats (PAW US 8 Comae 126 129 130 132 135 135 139 142 143 144 144 151 155 Europe 141 152 154 160 169 169 179 182 190 196 195 211 222 Ave 105 119 129 141 153 153 167 181 194 207 207 260 310 Rost of Wad i09 128 139 151 161 161 180 194 208 222 222 293 352 Total 483 526 662 584 618 618 665 699 736 768 768 912 1.039 Motile IMM 293 339 374 374 425 449 WY Gera 80% OO Gratin 12% 14% 14% 10% % citrobae MAW 54% 54% 55% 55% 57% 57% EMU as %of MAI US 8. Canoes 70% 70% 70% 70% 70% 70% 71% 72% 72% 7 72% 74% 75% EurOM 62% 64% 63% 63% 65% 65% 67% 67% 69% 7 70% 72% 74% Aaa 50% 51% 51% 51% 51% 61% 62% 63% St% 55 55% 58% 80% Rest of Wad 48% 51% 52% 52% 53% 53% 55% 56% 57% 5 58% 63% 66% Total 57% 58% 58% 58% 59% 59% 60% 61% 61% 62% 65% 67% YN Growth LISS Canada 27% 23% 11% 6% 7% 7% 8% 9% 8% 7% 7% 5% 3% Europe 34% 27% 27% 19% le% 18% 19% 16% 16% 8% 5% AS 64% 65% 5214 44% 46% 46% 40% 40% 37% 35% 35% 26% 19% Read World 91% 88% 59% 51% 48% 48% 43% 40% 38% 36% 38% 20% 22% Tour 48% 41% 72% 28% 28% 28% 26% 27% 26% 24% 24% 19% /4% Comity Mit US 8 Canada 26% 25% 24% 23% 22% 22% 21% 20% 19% 19% 19% 17% 15% Europe 30% 29% 28% 27% 27% 27% 27% 26% 26% 25% 25% 23% 21% Area 22% 23% 23% 24% 25% 25% 25% 26% 28% 27% 27% 29% 20% Regal Ward 23% 24% 25% 26% 28% 24% 27% 28% 28% 29% 29% 22% 34% Teal 100% 100% /00% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: J.P. Morgan esboales. Compa y dala. 15 EFTA01104703 North America Equity Research 12 September 2013 J.F!Morgan Facebook: Summary of Financials Income Statement - Annual FY12A FY136 FY14E FY156 Income Statement - Quarterly 1013A 2013A 3013E 4013E Revenues 5,089 7324 10.686 13.589 Revenues 1.458A 1.813A 1.955 2.298 Operating income 538 2.273 3.516 4.647 Operating income 373A 562A 590 719 D&A 649 968 1250 1.598 DIA 211A 230A 216 252 EBITDA 1,187 3,241 4.765 6,215 EBITDA 614A 792A 836 971 Net interest income (expense) (37) 0 0 0 Net interest income/ (expense) (15)A (14)A 0 0 Other income / (expense) (14) (16) 103 167 Other income / (expense) (20)A VITA 0 21 Pretax income 494 2257 3.618 4,815 Pretax income 353A 545A 590 741 Income taxes (441) (932) (1.520) (1,974) Income taxes (134)A (212)A (260) (326) Nel Income 53 1325 2.099 2,841 Net Income 219A 333A 331 415 Weighted average dluted 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 0.76 1.09 1.13 Diuted EPS 0.12A 0.19A 020 024 Balance Sheet and Cash Flow Data FY12A FY136 FY146 FY156 Ratio Analysis FY12A FY136 FY146 FY156 Cash and cash equivalents 2,394 3.798 7.383 11,557 Sales growth 37.1% 47.9% 12.0% 27.2% Accounts receivable 719 919 1.133 1,359 EBITDA growth 26A% 42.5% 382% 2&0% Other current assets 922 1287 1.389 1,644 EPS growth 5.3% 41.9% 13.8% 30.5% Current assets 11,267 13255 17.156 21,811 PP&E 2,391 3,109 4242 5.158 EBITDA margin 57.2% 55.1% 53.6% 54.0% Total assets 15,103 18.09D 23.125 28.695 Net margin 26.0% 25.3% 26.1% 27.4% Tots debt 1,500 0 0 0 Debt/EBITDA 0.5 0.0 0.0 0.0 Total labIttes 3,348 2.196 2.175 2.736 Shareholders equity 11,755 15,894 20.649 25.959 Return on assets (ROA) 12.2% 11,5% 13.6% 14.4% Reiman equity (ROE) 15.6% 13.8% 153% 16.0% Net Income (incbding charges) 53 1,297 2.099 2.841 D&A 649 968 1250 1.598 Enterprise value! EBITDA 37.6 25.7 18.0 13.5 Change in working capital (513) (181) (36) (220) Enterprise value / Free cash low 268.0 463 28.6 20.7 Other PIE 2.102.6 852 54.9 41.4 Cash flow from operations 1,614 3.547 5.413 6,687 Capes (1,235) (1,256) (1.817) (1,902) Free cash flow 409 2291 3.597 4,785 Cash flow from investing activities (7,021) (1,485) (1.817) (1,902) Cash flow from financing activities 6,283 (93) (566) (611) Dividends Dividend yield Source: Company reports and J.P. Morgan estimates. Note: Sin trillions (except pershare data).Fiscal yew ends Dec 16 EFTA01104704 Oou Anmuth North America Equity Research 12 September 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 (1) 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. Important Disclosures • Market Maker: JPMS makes a market in the stock of Facebook. • Client: J.P. 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FB US) Price Chart 78 65 52 — Share Price Price Target 1S) IS) 27-Jun-12 OW 32.23 45.00 Ance(51 04-Sep-12 OW 17.73 30.00 05-Oct-12 OW 20.91 28.00 26 24-Oct-12 OW 23.23 29.00 02-Jan-13 OW 26.62 35.00 1s 25-Jul-13 OW 34.36 44.00 0 May Aug Dec Mar Jul 12 12 12 19 Is Source. Moombug and JP. Morgan. prAa data *mad for mock spas and dlAdonds. maimed coverage Am 27. 2012. 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, Neutral, UW Underweight, NR - Not Rated 17 EFTA01104705 Dose Anmuth North America Equity Research 12 September 2013 J.P.Morgan 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. 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Periodic updates may be provided on companies/industries based on company specific developments or 19 EFTA01104707 Dots Anmu0t North America Equity Research 12 September 2013 J.P.Morgan announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised May 4.2013. Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. 20 EFTA01104708