Facebook liked by Polar Capital’s Nick Evans and Ben Rogoff

Polar Capital Technology fund managers Nick Evans and Ben Rogoff (pictured) are still evaluating Facebook, but indications are they would ‘like’ the stock.

We are still in the preliminary stages of our valuation work on Facebook, especially given the limited information currently available. That said, we see Facebook as an exceptionally well positioned business with high barriers to entry due to the scale and stickiness of the user base, consisting of 845 million active users.

Although rumoured Facebook valuations may look full based on historic revenue metrics, we believe the high growth rates are likely to be sustainable because the monetisation of users remains in the early stages. One interesting way to look at the opportunity is the $3.8 billion revenue in 2011 divided by 483 million daily active users which suggests they are currently only capturing $7.86 per user, per annum.

The most significant incremental opportunities lie-in better monetising their social mapping, enabling advertisers to precisely target small groups of users, and also mobile usage, which is a huge opportunity especially in emerging economies where smartphones are the primary method of accessing the internet.

Facebook’s profitability is clearly strong with operating margins already over 40 per cent. This compares favourably to Google’s which was in the mid 20%s in 2003 and 2004 around the time of their IPO. In itself, this combined with high growth rates justifies using a higher multiple of revenue for valuation. That said, Q4 2011 saw just 55 per cent revenue growth year-on-year which was a significant slowdown from 100 per cent plus in the previous four quarters. We will be watching reported Q1 growth closely to ensure we understand the extent to which this is influenced by increased mobile usage and how quickly the mobile opportunity can be monetised.

Some statistics from the recent filing:
• 845 million Monthly Active Users.
• 483 million daily active users. 360 million who logged in 6 out of 7 days. i.e. an everyday activity.
• 425 million used Facebook mobile products.
• 100 billion friend connections.
• 2.7 billion Likes & comments per day in 3 months to end December 2011.
• 250 million photos uploaded per day.

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