Private Company: Facebook, Inc.

Financial Projections, Valuation Analysis, Share Price Fair Value:

Facebook, Inc.
(NASDAQ: FB) (PrivCo Private Company Ticker: FACEP)
May 16, 2012

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCo Private Company Financial Analysis

May 16, 2012

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCo Investment Thesis on the Social Media Industry and Facebook

PrivCo: Social media/social mobile industry remains a strong basket of companies, still capable of massive 20x-100x returns for investors.

PrivCo: Facebook has a solid business model and capable management, but was a great investment 6-7 years ago when it could still generate huge returns given its risks.
PrivCo: A basket of younger private pre-IPO companies with a more attractive valuation such as Twitter, Spotify or Pinterest for example offer greater reward given the high risks of internet industries. (Company names provided are for illustration only and not
investment recommendations)

PrivCo: Facebook at $100B is overvalued and not worth its risk/reward profile. PrivCo investment strategy:
(1)Proxy investments in the pre-IPO social media basket via secondary markets (2)Pair Trades to bet on the long term growth of social media by shorting Facebook while going long on the pre-IPO social internet basket via secondary markets or public companies (e.g. LinkedIn). (Company names provided are for illustration only and not investment recommendations)

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Strength : User Engagement

User Stickiness
450 400 350 Avg. min/user 300 250 200 150 100

Stickiness compared to the competition

Facebook user engagement (405 minutes per month) outperforms rival social networking sites: 4.5x Pinterest and Tumblr, 19.3x Twitter

High Switching Costs

Users have a high barrier to switching to another network, which can involve rebuilding their own network.
Facebook Pinterest Tumblr Twitter

50
0 Avg min/user as of Jan 2012

Network Effects
As more users join, the more useful and valuable the network becomes

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 1: Decelerating Revenues

PrivCo: During Q1 2012, Facebook had its first ever quarterly revenue decline of -6.4% to $1.06 billion. PrivCo: During Q1 2012, Facebook experienced declines in Ad-revenues (-7%) and Facebook Credits/Payments (-1%). PrivCo: Q1 is seasonally weak for Facebook, but seasonality does not explain the decline. Facebook managed a flat Q4 2010 to Q1 2011. PrivCo: With same ad-revenue based seasonality at this same stage pre-IPO, Google managed sequential revenue growth of 27.2%, dispelling Facebooks explanation of its weak results and 1st quarter revenue declines as due largely to seasonality. If Google could still grow 27% from Q4 to Q1 before its IPO at a similar size and age as Facebook why was Facebook unable to do so?

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 1: Decelerating Revenues

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 1: Decelerating Revenues

Q1 2012 vs. Q4 2011
Google managed a slight increase (0.6%) despite the seasonality of the ad spend calendar while Facebook fell.

Q1 Seasonality Argument
Fails to account for decline. Google experienced gains both during 2012 and at the same stage pre-IPO. Facebook's declining growth is specific to Facebook and reflects clear organic slowdowns in its business.

Q2 2012 Projections
PrivCo expects FB will miss Q2 projections as declines are due to rapid mobile usage and Facebooks failure to monetize that format

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 2: Mobile Adoption

Rapid Mobile Growth
Facebook has yet to discover a monetization solution for its rapidly expanding mobile base where it simply lacks space for ads: 54% of March 2012 monthly active users (MAUs) were mobile users. Rapid growth in mobile and Facebooks inability to monetize it has negatively affected Facebooks profitability. Facebooks reactive acquisition of Instagram and their mobile base was in part to address its own unmonetized mobile base.

$1B Instagram Acquisition

Facebooks S-1 Statement Re: Mobile

We have historically not shown ads to users accessing Facebook through mobile apps or through our mobile website. We do not generate any meaningful revenue from the use of Facebook mobile products.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 3: Little Remaining Dry Powder

Rising Facebook Ads per Page

10 8 6 4 2 0 2009 2010 2011

Introduction of new, more intrusive ad formats is a clear response to poor ad performance. Sidebar ads increased from 5 to 7 per page. Forcing the Timeline upon its users to increase page views per visit. Allowing sponsored brand stories in brands fans newsfeeds; then allowing brand ads into fans friends newsfeeds. Larger Premium-ads which offer video and sound capabilities. Facebook has little real-estate remaining to increase advertisements.

PrivCo: Facebooks recent ad changes were for one time revenue infusions pre-IPO and its proceeding quarters. These measures failed to boost Q1 2012 revenue and will not be repeatable in 2013 and beyond.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 4: Facebook Fatigue

FB Use Declining Among Internet Users
In 2011, Facebook users globally reduced the frequency of key FB activities: searching for new contacts or sending message to friends

Users Are Rejecting Timeline

Facebook altered its successful platform in favor of timeline which offered greater ad space and clicks per page.

Frictionless Sharing
Automatic newsfeed updates regarding the users songs listened to or articles read because human to human sharing had declined.

PrivCo: Facebooks strict implementation of the timeline platform may be the worst corporate blunder since New Coke in 1985. We would not be surprised to see a re-adoption of Facebooks more popular prior format.
Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Material Weakness 5: Emerging Markets As Cost Centers

Facebook Quarterly Revenue Per Monthly Average User

Average Revenue Per User

Dropped during Q1 2012 to its lowest point in over a year at $1.17.

$1.40
$1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $Q2 Q3 Q4 Q1 2011 2011 2011 2012

Growth in Emerging Markets

Facebooks new users are coming from developing countries, which are difficult to monetize as big brands generally do not advertise in these regions.

Net Cost Centers

Emerging markets must become net profit centers as they are currently increasing costs faster than revenues.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Unmodeled Facebook Upside Potential:

China
RenRen Monthly Active Users China (in millions) 200 150 100 50 0 FY 2009 FY 2010 FY 2011 200 150 100 50 0 FY 2009 FY 2010 FY 2011 Facebook Monthly Active Users US & Canada (in millions)

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Private Company: Facebook, Inc.

Unmodeled Facebook Upside Potential

Untapped China Market:
China has the worlds largest internet market with over 500 million internet users, but Facebook has virtually zero presence there. Chinese equivalent RenRen had 38 million MAUs (7.6% of Chinese internet users) as of FY11, while Facebook had reached 65% of North American internet users at FY11. At that rate, China penetration could offer 325M users.

Facebook App Center:

Facebook has an existing app platform and plans to launch its App-Center soon. Facebook will receive 30% of paid-app sales. (Apples top ranked app store generated approximately $1.6BN during FY11 according to Apple estimates.)

Facebook Social Search Engine:

Facebook has currently integrated its personal information into the new Bing. Facebook has the potential to become its own social search engine given the amounts of personal information and engineering capabilities of Facebook.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Unmodeled Facebook Potential Downside

Mass Migration to Competitor:
Facebook operates in a competitive industry where users have other social media options such as Google+, Twitter, or Pinterest. Internet industries are also susceptible to unknown new start-ups which can upend an established competitor similar to Facebooks elimination of MySpace.

Mobile Adoption Becoming Ubiquitous:

Mass mobile adoption will threaten Facebooks ability to generate ad revenues.

Weakness of Competitive Position:

Facebook cannot sustain costly acquisitions of young competitors such as Instagram who rapidly threaten its base. Instagrams $1 billion price tag demonstrates how a young company can quickly pose a serious threat to Facebooks competitive position.
Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCos Facebook Forecasts

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Private Company: Facebook, Inc.

PrivCos Facebook Forecasts

PrivCos Assumptions:
Facebooks revenue will continue to be adversely affected by rapid mobile adoption. Facebooks costs will continue to rise as its user base expands particularly via unmonetizable emerging markets and mobile. Facebook Payments revenue will grow at a faster rate than advertisements as Facebook introduces new features such as the App Center, Search and Facebook Offers.
Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Facebook Valuation: Current Stock Price

Facebooks $34-$38 price range offers an initial valuation $85.4B$95.5B. PrivCo projects the final share valuation could be adjusted by as much as $2 above the high-end range with an ultimate target valuation of $95.5B-$100.5B. Facebooks final private market trades went for $44.10, giving a valuation of $104B. At a $100B valuation, Facebook is asking for 18.6x its forecasted 2012 revenues of $5.4B.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Facebook Valuation 1:Public Comparables

(Enterprise-Value to Revenue Multiples)

Revenue* Google Yahoo! AOL LinkedIn Yelp $35,460,000,000 $4,470,000,000 $2,120,000,000 $908,000,000 $131,000,000 Enterprise Valuation $197,310,000,000 $18,630,000,000 $2,430,000,000 $11,080,000,000 $1,240,000,000 Rev Multiple 4.3 3.7 1.0 11.5 8.5

PrivCo estimates a typical valuation of a tech company around 5x-10x revenues while Facebook currently asks for 18.6x. Given forecasted OI of $2.07B for 2012, Facebook is asking for slightly below 48x OI multiple which is much larger than its publicly traded peers.

*Projected 2012 Revenues

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Facebook Valuation 1:Public Comparables

(Enterprise-Value to Revenue Multiples)

Based on these comparable companies weighted average of enterprise value to revenue multiples, PrivCo believes a 9x revenue multiple accurately reflects Facebook and should be applied to its projected 2012 revenues.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Facebook Valuation 1:Public Comparables

(Enterprise-Value to Revenue Multiples)

Applying a 9x revenue multiple to Facebooks projected 2012 revenues of $5.4B results in a Facebook valuation of $60.3B. Based on the valuation and Facebooks 2.5 billion shares outstanding, PrivCo prices fair value of Facebooks stock at $24.12/share, significantly below the $34-$38 IPO price range.
Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Facebook Valuation 2: Discounted Cash Flow

Present value calculations for all future cash flows (net income) plus cash on hand results in a Facebook valuation of $62.6B. Based the valuation, PrivCo prices fair value of Facebook stock at $25.05/share, significantly lower than the IPO price range.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCos Facebook (NASDAQ: FB) Share Value Conclusions:

Short-Term BUY
Facebook shares will Pop in their opening days due to (1) media attention, (2) retail investor puts (i.e. small investors will buy regardless of price providing a built-in demand backstop to short term price), and (3) limited allocations to IPO investors which will increase FBs price upon opening trades. Recommendation: Buy at IPO price of $34-$38 to flip into short-term pops.

Long-Term SELL
Facebook is materially overvalued in its current range between $85B and $95B. Facebook will experience a post lock-up sell-off that will drive down future prices. PrivCo analysis concludes that markets will likely correct FBs price after an initial pop into a long-term fair value $24-$25 range, which falls significantly below the $34-$38 IPO price range.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCos Facebook (NASDAQ: FB) Share Value Conclusions:

PrivCo Predicts a Post Lock-up Sell-off of FB Shares due to the following:
1. RSUs:
RSUs are taxable immediately upon vesting/conversion to FB shares. FB shares must be sold to cover shareholder tax costs.

2. Rising Capital Gains Tax:

President Obama plans to allow the George Bush Capital Gains Tax Cut to expire next year. FBs lock-up period ends 1-month before the increase, and shareholders will off-load FB positions before the increased tax. Facebooks float on public markets post lock-up will be massive in an absolute sense with over 1 billion shares - over $40 billion in public float: larger than most of the S&P 500s market capitalization..

3. Public Float

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

PrivCos Final Forecasts of Where Facebook (NASDAQ: FB) Will Trade:

Facebook will be offered above or at the high-end of its $34-$38 range. Facebooks initial trades will pop well-above the IPO price given its hype, and massive demand by IPO investors. HOWEVER, PrivCo believes that Facebook is ultimately overvalued at $100B, and markets will correct Facebooks price per share below its IPO range into a $24-$25 range with a post lock-up sell-off that could further further diminish FB share price. PrivCos Final Conclusion: Facebook (NASDAQ: FB) is a very short-term BUY, and a long-term SELL.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.

Private Company: Facebook, Inc.

Analyst Contacts:
Sam Hamadeh, J.D./M.B.A. Phone: 917-701-1887 Email: [email protected] Christopher Minora Phone: 646-499-4550 Email: [email protected] Jeffrey Wayne Phone: 212-645-1686 Email: [email protected]

Disclaimer
Neither PrivCo nor its employees are owners or stakeholders in Facebook stock. PrivCo does not offer investment banking services. PrivCo assumes no responsibility for decisions based on information presented in this report.

Copyright 2012 PrivCo Media LLC. All Rights Reserved.