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Handout A.2
Case Study ― Facebook, Inc.
[FB]
All information included in this case study is based on public knowledge obtained from the sources
listed below.

Total Revenues (estimated, in millions US$)

Year Revenue Growth
2006 $ 52 —
2007 $ 150 188%
2008 $ 280 87%
2009 $ 775 177%
2010 $ 2,000 158%
2011 $ 4,270 114%

Facebook, Inc. is a U.S.-based Internet corporation that runs the social networking website, Facebook,
which has over 900,000,000 users worldwide. Facebook, Inc. was founded in 2004 by Mark
Zuckerberg, along with three others: Chris Huges, Eduardo Saverin, and Dustin Moskovitz.

Facebook is free for users to join and primarily earns money through advertising. The site made $3.7
billion in revenue in 2011, which was an 88% increase over 2010. Roughly 84% of this income came
from advertising.

Advertisers tend to be attracted to Facebook for two main reasons: its massive reach (of around 500
million daily users) and its ability to target ads at specific users based on the information they provide
to the company through the website.

The remaining revenue comes from payments for games and other add-on applications. Facebook, Inc.
takes a 30% cut of revenue from Zynga, the developer of FarmVille and other popular games, and a
similar cut from other game development companies. Virtual goods accounted for 12% of Facebook's
revenue in 2011, according to documents filed by the company with the Securities and
Exchange Commission.

© 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may
sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for
further details. This content is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors.
Facebook, Inc. filed for an initial public offering on February 1, 2012. The company planned a $5
billion IPO, the largest in Internet history and one of the largest in the history of the technology
sector. Facebook valued its stock at $38 a share, which priced the company at $104 billion: the largest
valuation to date for a newly public company. The company’s shares began trading on May 18, 2012
and though the stock struggled to stay above the IPO price for most of the day, it set a new record for
trading volume of an IPO with 460 million shares.

The first day of trading was marred by numerous technical glitches that prevented orders from going
through. These glitches and misleading information from underwriters prevented the stock price from
falling below the IPO price on the first day of trading. However, the stock price quickly fell in
subsequent days, closing at $34.03 a share on May 21 and $31.00 a share on the following day.

Facebook’s IPO is now under investigation and a class-action lawsuit is in the works due to the trading
glitches that led to botched orders. Additional lawsuits have also been filed due to allegations that an
underwriter1 for Morgan Stanley selectively revealed earnings information to preferred clients. Other
underwriters and Facebook's CEO and Board of Directors are facing similar litigation. It is believed
that a Facebook financial officer cautioned the underwriters about revenue growth because of a shift of
Facebook users to cell phones and mobile devices, where Facebook has less room to
advertise and generate revenue. The underwriters then cautioned top clients about this shortly before
the IPO, while leaving the general public ready to buy the overpriced shares. The litigation against
Facebook alleges that it failed to fully disclose its weakened financial outlook before its IPO.

By the end of May 2012, the stock had lost over a third of its initial value, dropping to $25.50. The
Wall Street Journal called the IPO "a fiasco." Fortunately, for Facebook investors, by mid-June 2012,
the stock value had rebounded to $32 a share.

Stock Prices over Time

The graph below shows the adjusted closing price for Facebook stock between mid-May and
mid-June 2012.2

Facebook Daily Adjusted Close

50
Stock Prices ($)

40
30
20
10
0
5/18/2012
5/20/2012
5/22/2012
5/24/2012
5/26/2012
5/28/2012
5/30/2012

6/11/2012
6/13/2012
6/15/2012
6/17/2012
6/19/2012
6/1/2012
6/3/2012
6/5/2012
6/7/2012
6/9/2012

1
An underwriter is a company that manages the issuance and distribution of stocks from a corporation. The underwriter works
closely with the corporation to determine the IPO stock price before buying stocks from the corporation and selling them to
investors. Underwriters generally receive fees from the corporations offering the stock and usually earn profits when selling the
shares to investors.

2
The adjusted closing price on a stock is the closing price of a stock on any trading day with adjustments for dividends and
stock splits. Here is a simplified example: if 20 shares of stock are traded at $100 per share, a stock split means the investor
now has 40 shares at $50. But showing a closing price per stock of $50 makes it appear the stock price dropped from $100 to
$50 when the stock really split. So a calculation is used by analysts to show the adjusted closing price so investors are more
easily able to look at historical stock prices.
© 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may
sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for
further details. This content is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors.
Sources:

 www.fundinguniverse.com/company-histories/facebook-inc-history
 www.fool.com/investing/general/2012/06/05/the-3-mistakes-facebook-investors-are-
making.aspx
 uk.finance.yahoo.com/news/how-does-facebook-make-money.html
 business.financialpost.com/2012/06/27/wall-street-analysts-like-dont-love-
facebook/uk.finance.yahoo.com/q/hp?s=FB
 www.investopedia.com
Directions:

In your group, decide which person or persons will answer each question. Briefly write notes in the
space provided. Then be prepared to present your answers to the class.

1. What is the company’s service or product?

2. Explain any new financial terms used in this case study.

3. What happened to the stock right after the IPO? Explain.

4. How did the stock perform over time?

5. What are some of the reasons for any change in the stock price?

6. How many people in your group would buy this stock right now? What are your reasons?

© 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may
sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for
further details. This content is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors.