Facebook Inc. Follow the Leader - Initiate OW

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1 NORTH AMERICA Stock Rating Overweight Industry View Attractive Follow the Leader - Initiate OW FB represents an unrivaled level of scale (1.4bn monthly users), targeting, and engagement for advertisers. The rapid growth in mobile drives its 30% revenue CAGR. After compression in 15, we see 400bp of EBITDA margin lift in 16. FB s growth is anchored in the fundamental transformation of the ~$50bn global display ad market: FB is leading this transformation, from a static desktop market, fragmented among ad platforms and publishers, to a mobile, rich media environment. FB today commands 20% of U.S. mobile time spent. We see global mobile display spend growing over 30% p.a. FB s share of global display grows from 20% in 14 to over 30% by 18, or to 15% of global online and 5% of total. Near-term, expectations have been re-set, limiting downside. Today s controversy is on margins, and we forecast operating leverage in 16 and beyond (see KD #2). Putting the 50%+ expense growth guide in 15 in context, Google has had 3 years of growth that high, typically followed by margin expansion the following year. We see adjusted EPS growth of 40% in 16, and growing 30% from 15 to 18. We see upside to consensus: We see upside from monetization given high and growing engagement (64% of its 1.4bn monthly users access it daily) and relatively modest CPM s (see Exhibit at right). While FB trades modestly above where GOOG traded at this point in its growth curve (39x fwd adj. EPS vs. 35x), we think downside is limited as the expense outlook is known and rev estimates appear conservative. Our DCF driven $90 target implies EV/fwd. EBITDA multiples fall from 31x today to 26x at YE15. FB and Google will increasingly compete head-on. With desktop search slowing (see our GOOGL initiation), GOOG is even more focused on mobile/display. For FB, two big opportunities are owning the ad tech stack in mobile (Atlas vs DoubleClick) and online video (vs. YouTube). Already these two represent ~60% of the U.S. online ad market. Morgan Stanley & Co. LLC Key Ratios and Statistics Benjamin Swinburne, CFA Benjamin.Swinburne@morganstanley.com Hersh Khadilkar, CFA, CPA Hersh.Khadilkar@morganstanley.com Alicia Tam Alicia.Tam@morganstanley.com Thomas Yeh Thomas.Yeh@morganstanley.com Reuters: FB.O Bloomberg: FB US Internet Media / United States of America Price target $90.00 Shr price, close (Oct 31, 2014) $74.99 Mkt cap, curr (mm) $213, Week Range $ Fiscal Year ending 12/13 12/14e 12/15e 12/16e EPS ($)** Consensus EPS ($) ModelWare EPS ($) P/E Div yld (%) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). = Consensus data is provided by Thomson Reuters Estimates. ** = Based on consensus methodology e = Morgan Stanley Research estimates With a 1.4bn monthly user base, we see Facebook narrowing the monetization gap US ecpm $18 $17 $17 $16 $14 $12 $10 $8 $6 $4 $2 $0 Broadcast Prime TV* Premium online video (on YouTube) $12 Cable Prime TV* $11 Online Video Industry $5 Pandora Desktop $3 $3 $2 $2 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. Twitter Pandora consolidated Pandora Mobile Facebook US consolidated $1 Non-video Display Industry Table of Contents Page FB Risk-Reward Snapshot.. 2 Key Debate #1: With MAU growth maturing in US, can monetization growth deliver? 3-7 Key Debate #2: What is the long-term margin profile for FB? Valuation Methodology and Risks Base, Bull, and Bear Scenarios.. 15 Key Financial Data and Forecasts

2 Risk-Reward Snapshot: (FB, Overweight, PT $90) $ $74.99 $ (+67%) $90.00 (+20%) $45.00 (-40%) 0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Price Target (Oct-15) Historical Stock Performance Current Stock Price Source: Thomson Reuters, Morgan Stanley Research. Price Target $90 Bull Case $125 Base Case $90 Bear Case $45 25x bull case 2017 EV / EBITDA discounted back 1 year to YE15 22x base case 2017 EV / EBITDA discounted back 1 year to YE15 20x 2016 bear case adj. EPS, similar to GOOG multiples during recession WARNINGDONOTEDIT_RRS4RL~FB.O~ DCF driven, and implies FB can command a 22x fwd EBITDA multiple at YE16, discounted back 1-year to YE15 (see Exhibits for DCF assumptions) Global share of mobile display grows to 60%. MAU growth remains in the high single digits due to product investments, while FB s global ad share of display budgets reaches 60% by Assumes 7% MAU CAGR through 2018, leading to ~6% higher global MAUs vs. base case by 2018, with a ~25% ARPU CAGR from higher monetization. FB meaningfully narrows the gap between N. America and int l markets, which approach 45% of NA ARPUs on a blended basis. Our bull case expects FB to continue to invest behind revenue strength, but deliver longer term incremental margins of ~50%. Global share of mobile display remains flat at ~50%. 5% MAU CAGR plus ~20% ARPU CAGR, leads to 25% EBITDA growth annual from 14 to 18. Global ARPU more than doubles by Margins expand post-2016 investment year as FB sees returns from rapid deployment in global sales teams. Base case leads to ~30% adjusted EPS growth from 14 to 18, with 16 growing 40% from 15. Base case incremental margins are in the 50-60% range vs 70-80% over the prior two years. Global share of mobile display falls to 35%. FB s share gains slow inside of display, and user growth matures globally % ARPU CAGR and 4% MAU CAGR, assuming ~70% incremental margins vs. base case. Relative to base case, we assume FB is less successful in closing the monetization gap in int l markets vs. the US, while heavy investment spend leads to less robust EBITDA growth. Our bear case PT assumes FB trades at ~20x fwd EPS, in line with Google s multiple during the 08/ 09 downturn. Key investment positives As the leading global social network, Facebook possesses a large and growing network of users and a sizeable database of self-disclosed interest and intent information that allow it to deliver ads with improved targeting & recall rates, providing meaningful value to brand advertisers to target specific audiences as well as support product launch efforts Facebook s developer platform allows app makers and web publishers to leverage its products providing instant personalization to users and better ad targeting for brands We expect mobile smartphone penetration to ramp globally from 35% to ~70% by 2020 from today, driving massive ad inventory for leaders like FB, that already commands 20% of mobile Internet time in the U.S. Key investment risks Facebook generates ~92% of its revenue from advertising; deterioration in the health of the ad market is likely to drive negative revisions Dilution of shareholder value due to stock issuances to fund employee compensation schemes or M&A The efficacy of mobile as a branding platform remains a question mark for advertisers, and pricing growth is critical for FB to thrive over time. There are both political and tax related risks to FB, along with its US based Internet peers. Focus on tax minimizing arrangements could lead to greater tax payments, while privacy issues could limit FB s growth. 2

3 Key Debate #1: With MAU growth maturing in US, can monetization growth deliver on big expectations? Market s view: FB has ample monetization potential although there are concerns about ad load being too high and how quickly monetization levels cam ramp outside the U.S. Our view: FB s healthy $25 of annual domestic advertising ARPU masks what is still a relatively low blended CPM across its ad products. We believe today s pricing reflects FB s scale, but not its unique targeting, and growing role helping advertisers market across mobile apps and devices. Despite its ~$11bn in ad revenue in 14, it is really early days in monetizing this platform. We also believe that display advertising is under a revolutionary transition from static desktop display fragmented among many publishers, to mobile rich media centered around a single platform FB (see Exhibits 1-3). Like Google in search, FB is quickly becoming the ubiquitous mobile display platform and we expect global mobile display industry growth to average 30% from 2014 through 2018, with FB capturing 50% of the market over that time. With respect to our estimates, we see upside to consensus revenue from 1) mix shift away from lower priced desktop display to mobile newsfeed display, 2) from driving greater engagement and time spent per MAU, particularly internationally through more public/professional content, integrated messaging, and becoming the default log-in for mobile apps, and 3) from converting static display to video ads, monetizing Instagram, and longer term building a mobile ad platform for third party publishers. Exhibit 1 Global smartphone growth is driving mobile advertising Connected devices Exhibit 2 as time spent on mobile drives mobile advertising impressions within the US Static Display Ad Impressions (in billions) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, E 2015E Source: ComScore, Morgan Stanley Research Mobile Desktop Mobile minutes as % of total US Internet time spent Mobile inventory 16% CAGR % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Exhibit 3 Global mobile display (including video) spending to increase over 30% annually USD, in millions 50, , , , , , , , , , E 2017E Global Mobile Display Advertising Mobile Video 2014E CAGR 31% 2018E Static Mobile Display 2018E 2019E 2020E 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, North America Europe Asia ROW Global Smartphone Connections 3

4 Exhibit 4 Our 15 and 16 revenue and EBITDA estimates are above consensus MSe vs. Consensus 4Q14E 2015E 2016E MSe Revenue $3,797 $17,401 $22,703 Adj. EBITDA $2,426 $10,301 $13,863 Non-GAAP EPS $0.48 $1.92 $2.72 GAAP EPS $0.22 $0.79 $1.42 Consensus Revenue $3,776 $17,038 $22,175 # of estimates Adj. EBITDA $2,435 $10,086 $13,579 # of estimates Non-GAAP EPS $0.48 $1.92 $2.55 # of estimates GAAP EPS $0.27 $1.15 $1.75 FB as an advertising platform is about scale, addressability, and targeting. To put scale into perspective, Facebook s 1.4bn global MAUs represents almost half of global internet users and more than 55% of global smartphone connected users. Exhibit 6 Facebook s total monthly user base is already as large as the total population of China! MSe vs. Consensus Revenue 0.6% 2.1% 2.4% Adj. EBITDA -0.4% 2.1% 2.1% Non-GAAP EPS -0.1% 0.2% 6.5% GAAP EPS -19.9% -31.3% -19.0% MS vs. Consensus Estimates 10% 0% -10% -0.4% 4Q14E 2015E 2016E 0.6% -0.1% 2.1% 2.4% 2.1% 2.1% 0.2% Adj. EBITDA Revenue Non-GAAP EPS, Thomson Reuters Exhibit 5 We see healthy upside as Facebook increases its share of global display advertising Facebook % share of global online advertising dollars 60% 50% 40% 30% 20% 10% 0% 10% 33% 49% 6.5% 53% 52% E 2015E 2016E WW online ad spend WW online mobile display ad spend, MAGNAGLOBAL Source: Company Data, World Bank, Morgan Stanley Research Exhibit 7 FB already has 50%+ penetration of global Internet and smartphone users Penetration of key digital markets 60% 50% 40% 30% 20% 10% 0% 2009 FB total MAUs % of global internet users FB mobile MAUs % of global smartphone connections Source: Company Data, ComScore, IDC, World Cellular Information Service, Morgan Stanley Research MAU growth may be maturing, but engagement is growing: As seen in Exhibit 8, MAU additions have slowed globally in 2014, particularly in North American where FB is now at 70% of total Internet users. From here, FB s growth is going to be more dependent on engagement, time spent, and ultimately monetization. In engagement, Exhibit 9 highlights the DAU/MAU levels across its regions and even in its most mature market in the E 2015E 4

5 face of tremendous competition for mobile time, FB is growing. Importantly, the MAU mix continues to shift towards mobile. As highlighted in our Internet Media initiation Bringing It All Together, desktop usage in the U.S. is declining as mobile usage is growing. As seen in Exhibit 10, 83% of FB s MAU s are now mobile. Regarding time spent, Exhibit 11 shows a fairly flattish share of US time spend online when Instagram is included. Exhibit 8 User growth remains healthy, but is maturing MAU net adds, in millions Exhibit 10 Already, 83% of FB s MAUs use FB on mobile Mobile users as % of total reported users 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% E Mobile MAUs Exhibit 11 and time spent continues to be healthy FB Desktop Minutes FB's % of Total Desktop Internet FB's % of Total Internet (D+M) FB Mobile Minutes FB's % of Total Mobile Internet E 2015E 2016E 2017E 2018E North America - MAUs Europe - MAUs Asia - MAUs ROW - MAUs Exhibit 9 Yet engagement (DAU / MAU) continues to grow Bps change in engagement (DAU / MAU ratio) 700 bps 600 bps 500 bps Time spent on Faacebook in US (minutes) 700, , , , , , , Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 25% 20% 15% 10% 5% 0% Facebook as % of Total Internet 400 bps Source: ComScore, Morgan Stanley Research 300 bps 200 bps 100 bps -- (100) bps E NA Europe Asia ROW 5

6 Exhibit 12 Driving int l engagement should lift global ARPU Engagement (DAU / MAU), 2014E 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 75.5% 71.9% 60.9% 57.3% 62.8% Exhibit 13 Facebook ad impressions still skew primarily desktop given greater real estate than on mobile share of total FB core impressions 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% RHR ads per pageview reduced to 2-3 from 7 ads We expect mobile to grow to 20% of impressions by 2018 from 0% in % % NA Europe ROW Asia Mobile Desktop Right Hand Rail ad impressions Mobile display ad impressions Video ad impressions Desktop Newsfeed ad impressions Instagram ad impressions NA Europe ROW Asia Mobile On monetization, we have framed the opportunity for FB three ways. First, we look at mix of impressions over time in Exhibit 13, which shows low priced direct-response heavy RHR ads falling as mobile newsfeed inventory increases. FB is proactively reducing RHR inventory on desktop, and the consumer shift to mobile is driving up mobile usage. Second, we highlight the introduction of video advertising on FB and display advertising on Instagram, as well as the growing contribution from the recently closed What s App acquisition in Exhibit 15. Finally, we show in Exhibit 16 the narrowing of the gap between the international markets and the U.S. Exhibit 14 but time spent now skews more heavily to mobile Instagram Mobile Desktop Time spent on Facebook platform (US only) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14, Comscore Exhibit to 14, ARPU has grown ~30%, new products and higher int l should help it grow 20% through 18 Total ARPU, annualized $25.00 $20.00 $15.00 $1.19 $2.44 $10.00 $5.00 $ E 2015E 2016E 2017E 2018E $10.19 $4.92 Desktop Mobile ex Instagram Instagram Video Atlas Whatsapp Other 6

7 Exhibit 16 Our model assumes the monetization gap between US and international markets narrows longer term Exhibit 17 While Facebook average advertising ARPUs appear high relative to peers Ratio to NA ad ARPU 0.70x 0.60x $30 $ E US annual advertising ARPU $ x 0.40x 0.30x 0.20x 0.10x x 0.17x 0.13x E 2015E 2016E 2017E 2018E 2019E 2020E Europe Asia ROW It also worth noting that while mobile advertising is growing, it is partially cannibalizing desktop, so this spending is not all incremental. In general, although not on FB, mobile CPM s are lower than desktop as advertisers are unsure of the value of mobile for branding and typically use it for remnant and direct response advertising. As seen in Exhibit 18, for Pandora its ecpm on mobile display (blended between premium and remnant) is roughly one-third the rate of a desktop impression. $20 $15 $10 $5 $0 $10 $13 Pandora Twitter Facebook ; Comscore Exhibit 18 CPM s are quite low (base case assumes ~25% CPM CAGR across platform, 14-18) US ecpm $18 $17 $17 $16 $14 $12 $10 $8 $12 $11 We are truly in the early days of mobile advertising, and agencies and advertisers alike are still figuring out how to effectively leverage mobile. FB s significant investment in a mobile ad tech stack, anchored by the recently launched Atlas platform, aims to move this transition forward while benefiting FB as well. When we look at CPM s and compare FB s consolidated ecpm to other global Internet players and traditional advertising platforms (see Exhibit 18), we see significantly upside from monetization if mobile can be fully developed. $6 $4 $2 $0 Broadcast Prime TV* Premium online video (on YouTube) Cable Prime TV* Online Video Industry $5 Pandora Desktop $3 $3 Twitter Pandora consolidated $2 $2 Pandora Mobile Facebook US consolidated $1 Non-video Display Industry If successful, FB can take what is today a quantity advantage in display advertising (1.4bn WW users, 1.3 trillion monthly ad impressions) and add layers of value-add (Custom Audiences, Atlas ad network, etc.) to drive pricing which is unique among its competitive set. FB is not display in the web portal sense, but has the opportunity to take display to a level of reach and targeting well beyond historic online display. FB s core product continues to evolve: As it aims for higher time spent on its platform, a more premium advertising experience, and a greater off-fb ad reach, its consumer proposition could evolve. It may become less social and more media/commerce, with consumers seeing more news, entertainment, sports information curated on their FB pages alongside e-commerce options and less page one real estate dedicated to social (friends and family) content. 7

8 Exhibit 19 Our 30% estimated CPM CAGR assumes modestly lower ad load, and mix shift towards mobile Exhibit 20 Likely conservative, we assume Facebook video revenues remain well below YouTube 2014E 2018E CAGR Facebook WW Monthly Active Users (reported) 1, , % Daily Active Users (reported) , % Mobile MAUs (reported) 1, , % Mobile DAUs (reported) % $16,000 $14,000 $12,000 Facebook Video Revenue ($mm) YouTube, gross Total ad impressions/dau/day % $10,000 Desktop Right Hand Rail ads/day/dau % Desktop Newsfeed ads/day/dau % Mobile Display ads/day/mobile DAU (incl. Instagram) % Mobile Newsfeed ads/day/mobile DAU % Instagram ads/day/instagram Mobile DAU % Video ads/day/dau % Atlas ads/day/dau NA $8,000 $6,000 $4,000 $2,000 Platform average price per '000 ad impressions (CPM) $0.74 $ % $ E 2015E 2016E 2017E 2018E 2019E 2019E Core Facebook CPM, ex-atlas contribution $0.74 $ % Desktop Right Hand Rail ad CPM $0.16 $ % Desktop Newsfeed ad CPM $1.34 $1.21-3% Mobile blended ad CPM $5.17 $5.53 2% Mobile Newsfeed ad CPM $4.11 $4.26 1% Instagram ad CPM $20.00 $ % Video ad CPM $2.04 $2.20 2% Atlas gross ad CPM $0.00 $0.18 NA Exhibit 21 Similarly, our forecast assumes a modest ramp in Atlas revenue relative to Google s Display Network $ in millions $7,000 Revenue ($mm) Both its attempt to establish itself as the mobile advertising platform, for its own inventory and the entire mobile ad market, and its still nascent plans in video, bring it into stark competition with Google. As detailed in our industry report, these two will be increasingly bumping into each other from an earnings achievability perspective. Our relative preference for FB includes a view that estimates are more achievable here than for GOOG. $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Facebook Atlas Google Display Network $ E 2015E 2016E 2017E 2018E 2019E 2019E 8

9 Key Debate #2: What is the long-term margin profile for FB? Market s view: The guidance for 15 expense growth has raised concerns about the longer term margin outlook for FB, and investors are unclear where the incremental spending is going. Our view: FB is investing behind its top line strength, with investments in engineering talent, new product initiatives, and behind recent acquisitions including WhatsApp. While we share the market s concerns about the pace of expense growth, particularly FB s ability to so quickly ramp its employee base effectively and efficiently (see Exhibit 22), we now believe expectations have been appropriately reset limiting margin risk to the stock in 15. In addition, the incremental margins should ramp in 16 as the company leverages its significant investment spend next year. Exhibit 23 Facebook guidance metrics vs. MSe 4Q Guidance MSe Guidance MSe Guidance MSe 3Q14 Earnings Call (10/28/2014): % change Y/Y Revenue % 46.9% 57.7% 40.2% GAAP Tax Rate (absolute) % 48.0% 42.7% % 51.8% Non-GAAP Tax Rate (absolute 34.7% 34.7% 34.8% 34.7% 34.7% GAAP Expenses % 44.5% % 69.5% Non-GAAP Expenses % 32.1% % 58.8% Exhibit 24 Components of 2015 GAAP operating expense growth 70.0% 60.0% Components of 2015 Opex Growth 21.4% We see three primary investment areas, all of which should see some leverage beginning in 16 1) sales people for greater int l monetization, 2) R&D for long-term product initiatives include FB s mobile ad network platform, led by Atlas, and 3) acquisition related investment. 50.0% 40.0% 30.0% 20.0% 10.5% 16.7% 6.4% -0.6% 5.5% 69.5% 10.0% Exhibit 22 Facebook headcount up ~30% YTD, similar to growth across the industry --% 2014 Total GAAP operating expenses 9.7% Cost of revenue Sales and marketing R&D G&A Non-recurring Amortization Stock comp items of intangibles 2015 Total GAAP operating expenses* Headcount 50,000 40,000 30,000 20,000 10,000 0 Google Facebook Twitter 51,564 8,348 3,600 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 +18% YTD +32% YTD +33% YTD Near term International monetization remains a big opportunity, as we have seen healthy ARPU growth in the North American market of late as the business has transitioned from desktop to mobile, but int l monetization still has actually lagged (see Exhibit 25). We see big investment in sales and marketing talent around the world in 15 driving this monetization opportunity in the next 2-3 years. On the product front, we see Instagram and video advertising growing in contribution as well, which will remain small in 15 but we believe become meaningful in 16. Where is FB investing in 15? Guidance for 55-75% GAAP expense growth lowered consensus expectations for 15, described as an investment year by the company. Exhibit 24 shows our expectation for 15 by expense category. These investments tie into both near, medium, and longer term growth plans. 9

10 Exhibit 25 Our model assumes the monetization gap between US and international markets narrows longer term Ratio to NA ad ARPU 0.70x 0.60x 0.50x 0.40x 0.30x 0.20x 0.10x x 0.17x 0.13x E 2015E 2016E 2017E 2018E 2019E 2020E Europe Asia ROW Medium term Product development is another key area of incremental investment, anchored by spending in R&D which we estimate will double in 15 to ~$4.9bn (incl. stock comp and amortization). In addition to innovating around Facebook s core consumer offering to drive engagement and time spent, we expect much of this capital to go towards FB s growing ad tech stack led by the recently re-launched Atlas. It is critical for FB to continue to grow and deliver on the market s expectations, that it moves off of FB s own properties and can monetize more broadly across mobile. This requires significant capital in technology, measurement, and advertiser/publisher tools to become ubiquitous. Long term FB has plans to build product and platforms to bring to market over a ten year timeline. While we do not expect recent acquisitions to take that long to translate into revenue, we do think WhatsApp will be a platform that will generate meaningful losses for years. We struggle to defend the $18bn in cash and stock FB is paying for this platform, which could reasonably lose $400-$500mm in operating losses over the next 3 years (Exhibit 26), but we think those losses will likely peak in 15. Exhibit 26 We believe WhatsApp could reasonably remain unprofitable over the next few years, but with losses peaked in 15 WhatsApp Financial Statements $millions 2012A 2013A 2014E 2015E 2016E Revenue $3.8 $10.2 $30.6 $181.4 $429.7 YoY growth (%) 167.2% 199.7% 492.8% 136.9% Costs and expenses: Cost of revenue R&D G&A Sales and marketing Total expenses YoY growth (%) 150.3% 226.4% 31.4% 19.7% EBIT ($55.6) ($138.5) ($454.7) ($456.3) ($333.6) Add: D&A EBITDA ($55.5) ($138.4) ($454.6) ($456.3) ($333.5) Other expenses Net loss ($54.7) ($138.1) ($454.7) ($456.3) ($333.6) What is reasonable for 16 and beyond on the margin front? There are limits to hiring levels, and FB s ~$3bn in non-gaap expense growth in 15 is likely pushing that level before it becomes difficult to efficiently bring on this much new talent in a short period of time without diluting productivity. Moreover, we think these investments will nicely scale in 16 and beyond as FB launches layers new revenue streams on top of its existing news feed product set, and expense growth moderates. What Google s history tells us: As Google has shown during its first 5 years as a public company, reaching ubiquity in Internet advertising (which essentially translates into becoming the primary if not exclusive platform upon which a given advertising vertical search, display, etc. is built) is a highly profitable endeavor. 10

11 Exhibit 27 From 2005 to 2007, Google YoY operating expenses doubled every year, on average 200.0% 180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 176.6% YoY growth in Google opex 75.0% 63.1% Exhibit 28. But lead to meaningful margin expansion 45% 43% 41% 39% 37% 35% 33% 31% 29% 27% 25% 33.5% Google Adjusted EBITDA margins 40.9% 42.7% 41.7% Exhibit 29 One step back, two steps forward: operating leverage walk from 14 EBITDA margins to 16 weighted % change Y/Y 50.0% 5.7% Positive impact to EBITDA margins Negative impact to EBITDA margins 45.0% 40.0% 1.6% 5.1% 1.7% 1.5% 1.0% 1.8% 0.6% 35.0% 51.0% 30.0% 40.4% 44.0% 25.0% 20.0% 15.0% 2014 EBITDA margin Operating costs Amortization Stock-based of intangibles compensation D&A 2015 EBITDA margin Operating costs Amortization Stock-based of intangibles compensation D&A 2016 EBITDA margin 11

12 Valuation Methodology & Risks How we value FB Facebook is not inexpensive on any near-term earnings metric, although we expect EPS and FCF/share to grow 25-30% annually from 15 through 18. For shares to outperform, it must deliver on expectations, driving positive revisions from here, and provide investors with enough optionality for it to sustain its premium multiple. Our base case price target of $90 is DCF driven. We note that our expectation is FB, like Google, will build meaningful cash or deploy cash and stock in acquisitions rather than add financial leverage and return capital to shareholders. In this regard, the lack of any debt in this record low interest rate environment weighs on the cost of capital and the DCF value. Our $90 base case price target implies shares will trade at 26 times 16 EBITDA (compared to 31x 2015 EBITDA today) and 46 times 16 FCF / share (compared to 55x 15 FCF / share today). FB s net cash position also renders levered multiples less helpful, which is why we highlight EV/EBITDA. In addition, given significant acquisition related intangibles from What s App and other acquisitions, FCF/share is a better levered earnings metric than EPS. Our bear case of $45 implies the EV/EBITDA multiple compresses to 16 times, and our bull case implies it expand to 35 times. See page 2 for an explanation of our bull and bear case operating assumptions. What does Google s historical trading range tell us about FB? Perhaps because Google is Google, namely a ~$400bn market cap company that has grown revenue ~50% annually since its IPO, FB is being priced at a PEG premium to Google at this point in its growth curve. Exhibit 30 illustrates that our expectation of 40% FB revenue growth in 15 ties roughly to what Google delivered in 2007, when it traded at a 4 turn P/E multiple discount to FB. Said differently, there were skeptics on Google that were proven wrong, and it appears FB is benefiting. company, we see some potential home runs (Instagram and Atlas) and some that will likely be difficult to generate an attractive return against the cost (What s App for $18bn). Exhibit 30 Facebook s revenue % change Y/Y trajectory is trending similarly to Google s early years Price / fwd adj. EPS to NTM Revenue Growth 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x Y/Y Estimated NTM Revenue Growth 0.97x FB PEG, Nov-14 GOOG 0.73x GOOG PEG, 3Q07 Y/Y Estimated NTM Revenue Growth Price / fwd adj. EPS PEG Price / fwd adj. EPS PEG Sep x Jun x Dec % 61.2x 1.42x Sep x Mar % 45.4x 0.68x Dec x Jun % 53.4x 0.80x Mar % 44.6x 1.45x Sep % 49.1x 0.80x Jun % 41.1x 1.39x Dec % 53.1x 0.74x Sep % 60.6x 1.57x Mar % 44.2x 0.69x Dec % 52.6x 1.34x Jun % 41.8x 0.69x Mar % 47.8x 1.07x Sep % 35.6x 0.62x Jun % 45.5x 1.06x Dec % 35.9x 0.64x Sep % 44.4x 1.06x Mar % 32.0x 0.60x Nov % 39.0x 0.97x Jun % 32.7x 0.67x Mar-15 Sep % 33.1x 0.73x Jun-15 Dec % 35.5x 0.77x Sep-15 Mar % 22.4x 0.61x Dec % Jun % 24.8x 0.71x Mar-16 Sep % 18.6x 0.61x Jun-16 Dec % 14.8x 0.95x Sep-16 Mar % 16.7x 1.90x Dec % Jun % 19.4x 2.85x Mar-17 Sep % 21.5x 2.11x Jun-17 FB Long-term, capital allocation will matter: FB s top line growth, envious margin profile, and strategic position will allow it to take long-term bets without clear returns as long as the growth remains intact. However, as we have seen with companies that ultimately face the law of large numbers (Amazon, Google, Microsoft), investors eventually grow frustrated. Exhibit 31 lists FB s acquisitions since its IPO, including the cost and a brief description of each. As with any 12

13 Exhibit 31 History of Facebook acquisitions Pre-IPO Acquisition Purchase Price Financing Target Date ($US MM) Cash Stock Company Description LiveRail Jul '14 ND Offers comprehensive platform for online video publishers Oculus Jul '14 $2, % 80% Develops virtual reality technology WhatsApp Feb '14 $18,376.1, + 46mm RSUs at roughly $3,600 value 25% 75% Cross-platform mobile messaging app Atlas (from MSFT) Feb '13 Not disclosed, sources suggest $50-100mn Ad serving and measurment platform Instagram Aug '12 $ % 42% Online mobile photo-sharing, video-sharing and social networking service FriendFeed Aug '09 ND Real-time feed aggregator that consolidates the updates from social media Parakey Jul '07 ND An open-source and nonprofit web browser Treatment of stock comp: Facebook is led by some of the most talented employees in the world, highly educated, motivated, and entrepreneurial. The competition for talent is fierce and equity based compensation is a significant element of hiring, retention, and ultimately how these companies innovate and compete over time. Exhibits 32 highlights stock comp expense per head and as a percent of revenue for Facebook since it IPO d and more recent trends. Similar to Google and Twitter, Facebook has used restricted stock to compensate employees, which ultimately will lead to increases in diluted shares (apart from equity issued for acquisitions). The calculation of fully diluted shares as a result of RSU s outstanding is complex, as is forecasting stock comp expense. We have done our best to do both with the aim of including stock compensation as an operating expense in our valuation work. Why? If these employees were not rewarded in valuable stock, they would require cash (likely more cash given lack of additional upside relative to the equity) and to ignore it or add it back to GAAP earnings is a mistake in our view. For tech firms more than any other sector, stock comp is a critical investment necessity, and removing it from valuation consideration is a flawed approach in our opinion. Exhibit 32 Shares issued for acquisitions will drive SBC SBC / employee ('000s) $100.0 $90.0 $80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $- 20.2% 17.3% 17.9% 18.7% 18.8% 19.2% 20.7% 19.5% 15.7% 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 SBC, % of GAAP operating expenses 35.0% 29.9% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Exhibit 33 Unrecognized compensation cost will also step up Period end unrecognized compensation cost (RSUs) $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $2,210 $2,690 $9,839 $8,976 $10,443 $11,393 $11, What are the risks? For all three of these impressive companies, meeting expectations is perhaps the largest risk to shares. In addition, the market appears to be taking three factors for granted cyclicality of business model, political risks largely around taxes, and stock compensation as critical source of competitive position. First, these are essentially entirely advertising businesses. As an illustration, in 2009 Google s shares troughed at 15 times GAAP EPS in a year where ad growth grew 9%. Clearly, a recession and particularly a global recession, would sting for Facebook as well as its peers. Along those lines, recent FX rates are a major headwind for both FB and Google in particular. 13

14 % MORGAN STANLEY RESEARCH Exhibit 34 Non-US represents ~60% of FB s 2014 revenue 70% 60% 50% 40% 30% 20% 10% 0% % of international revenue E 58% 58% 33% Google Facebook Twitter, Thomson Reuters Exhibit 35 implying a ~300bp headwind at current rates 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0% Google Facebook Twitter -3.7% % 2015 revenue headwind from FX -2.9% -1.5% Lower FX headwind vs. Google due to lower exposure to Europe / UK, Thomson Reuters Second, there is a loud and growing refrain in Europe against these global online platforms (see our recent Netflix report, Europe Gives, and Europe Takes ). The EU investigation into Google in its fourth year is a manifestation of this political backlash and it is one that should be taken more seriously by investors. As Facebook expands its presence worldwide, similar potential regulatory scrutiny would likely create uncertainty. Google has implemented the so-called Double Irish structure (see New York Times diagram published April 28, 2012 for an illustration of how this works) that has reduced its consolidated tax rate to 20%. FB is, we believe, while not there yet is on its way to implementing a similar structure. However, we note that hypothetically assuming a higher tax rate beginning in 2018 (as an illustration, see Exhibit 36) could represent ~$10 per share or 10-15% of Facebook s current share price. There remains tremendous pressure, both in and among EU members and here in the US, to get at these transfer-pricing reduced profits. Ireland recently announced plans to eliminate this structure by 2020, and is no longer allowing new applicants. If we do see corporate tax reform in the U.S. that follows the lower the rate, broaden the base approach, Google would be one of the primary victims. Both party s tax reform platforms include a minimum tax on offshore licensing revenue aimed directly at the likes of Google and other tech firms. The issues extend to privacy, which of course is relevant for FB as well. Exhibit 36 Hypothetically, assuming Facebook s tax rate steps up in 2018 and beyond could represent ~$10 in value per share today (10% WACC) NPV per share of higher tax rate Hypothetical tax rate, beginning in % 29% 31% 33% 8.0% $7 $10 $13 $16 $19 8.5% $6 $9 $12 $14 $17 9.0% $6 $8 $11 $13 $15 9.5% $5 $7 $10 $12 $ % $5 $7 $9 $11 $ % $4 $6 $8 $10 $ % $4 $6 $7 $9 $11 WACC Note: NPV based on the difference in cash taxes beginning with a rate increase in 2018, as compared to our base case model which assumes a ~20% cash tax rate through the terminal year. Our base case DCF assumes an 9.7% WACC 14

15 Exhibit 37 Facebook Summary of Base, Bull and Bear Cases Base Case Bull Case Bear Case 2014E 2015E 2016E 2017E 2018E 2014E 2015E 2016E 2017E 2018E 2014E 2015E 2016E 2017E 2018E Non-GAAP EPS $1.71 $1.92 $2.72 $3.68 $4.70 Non-GAAP EPS $1.71 $1.94 $2.85 $4.06 $5.41 Non-GAAP EPS $1.70 $1.70 $2.24 $2.89 $3.50 % growth 83% 13% 41% 35% 28% % growth 84% 13% 47% 43% 33% % growth 82% 0% 32% 29% 21% EPS (GAAP) $1.06 $0.79 $1.42 $2.18 $2.76 EPS (GAAP) $1.07 $0.80 $1.55 $2.56 $3.47 EPS (GAAP) $1.06 $0.57 $0.94 $1.39 $1.56 % growth 78% -26% 80% 53% 27% % growth 79% -25% 92% 65% 35% % growth 77% -46% 66% 48% 12% Revenue $12,412 $17,401 $22,703 $27,837 $32,877 Revenue $12,451 $17,544 $23,845 $31,025 $38,170 Revenue $12,345 $16,057 $19,626 $22,852 $25,499 % growth 58% 40% 30% 23% 18% % growth 58% 41% 36% 30% 23% % growth 57% 30% 22% 16% 12% Adjusted EBITDA $8,083 $10,301 $13,863 $17,915 $22,062 Adjusted EBITDA $8,104 $10,372 $14,453 $19,615 $25,111 Adjusted EBITDA $8,039 $9,241 $11,656 $14,387 $16,836 Margin (%) 65% 59% 61% 64% 67% Margin (%) 65% 59% 61% 63% 66% Margin (%) 65% 58% 59% 63% 66% EBITDA $6,330 $7,022 $9,987 $13,225 $16,198 EBITDA $6,351 $7,093 $10,577 $14,925 $19,247 EBITDA $6,286 $5,961 $7,780 $9,697 $10,972 Margin (%) 78% 68% 72% 74% 73% Margin (%) 78% 68% 73% 76% 77% Margin (%) 78% 65% 67% 67% 65% Incremental margin (%) 55% 14% 56% 63% 59% Incremental margin (%) 55% 15% 55% 61% 60% Incremental margin (%) 55% -9% 51% 59% 48% Operating Income (GAAP) $5,090 $4,986 $7,476 $10,217 $12,695 Operating Income (GAAP) $5,110 $5,054 $8,047 $11,846 $15,588 Operating Income (GAAP) $5,045 $3,946 $5,349 $6,862 $7,765 % growth 82% -2% 50% 37% 24% % growth 82% -1% 59% 47% 32% % growth 80% -22% 36% 28% 13% Margin (%) 41.0% 28.7% 32.9% 36.7% 38.6% Margin (%) 41.0% 28.8% 33.7% 38.2% 40.8% Margin (%) 40.9% 24.6% 27.3% 30.0% 30.5% FCF / share $1.60 $1.38 $1.97 $2.67 $3.51 FCF / share $1.60 $1.39 $2.05 $2.95 $4.06 FCF / share $1.60 $1.20 $1.57 $2.00 $2.48 Global Revenue Drivers Global Revenue Drivers Global Revenue Drivers Total advertising revenue $11,433 $16,358 $21,536 $26,580 $31,513 Total advertising revenue $11,469 $16,488 $22,656 $29,738 $36,768 Total advertising revenue $11,366 $15,023 $18,473 $21,614 $24,160 % mobile advertising revenue 64.8% 69.6% 69.0% 67.6% 67.3% % mobile advertising revenue 64.9% 69.2% 69.5% 69.6% 70.2% % mobile advertising revenue 64.6% 67.3% 64.7% 61.4% 59.0% Share of WW mobile display spend 48.6% 53.2% 52.4% 50.0% 50.0% Share of WW mobile display spend 48.8% 53.3% 55.5% 57.4% 60.5% Share of WW mobile display spend 48.1% 47.3% 42.4% 37.4% 34.4% Total payments/other revenue $980 $1,042 $1,167 $1,257 $1,364 Total payments/other revenue $982 $1,056 $1,189 $1,286 $1,402 Total payments/other revenue $979 $1,034 $1,154 $1,238 $1,339 Global MAUs 1, , , , ,707.8 Global MAUs 1, , , , ,814.6 Global MAUs 1, , , , ,646.9 MAU growth % 13.4% 7.5% 5.5% 4.5% 3.6% MAU growth % 14.7% 8.8% 6.8% 5.8% 4.8% MAU growth % 13.0% 6.6% 4.7% 3.7% 2.7% Advertising ARPU (MAU), quarterly $2.18 $2.83 $3.50 $4.12 $4.69 Advertising ARPU (MAU), quarterly $2.18 $2.80 $3.58 $4.42 $5.18 Advertising ARPU (MAU), quarterly $2.17 $2.62 $3.05 $3.43 $3.72 % growth 43% 30% 24% 18% 14% % growth 42% 29% 27% 23% 17% % growth 42% 21% 16% 12% 8% NA Advertising ARPU (MAU), quarterly $6.36 $7.95 $8.96 $9.89 $10.77 NA Advertising ARPU (MAU), quarterly $6.36 $7.77 $9.00 $10.08 $10.87 NA Advertising ARPU (MAU), quarterly $6.34 $7.80 $8.77 $9.68 $10.52 % growth 58% 25% 13% 10% 9% % growth 58% 22% 16% 12% 8% % growth 57% 23% 12% 10% 9% Europe ARPU as % of NA 42% 41% 45% 48% 52% Europe ARPU as % of NA 42% 42% 46% 51% 56% Europe ARPU as % of NA 42% 40% 43% 45% 48% Asia ARPU as % of NA 17% 23% 29% 31% 33% Asia ARPU as % of NA 17% 24% 30% 34% 36% Asia ARPU as % of NA 17% 23% 28% 31% 33% ROW ARPU as % of NA 13% 15% 20% 24% 28% ROW ARPU as % of NA 13% 15% 20% 26% 34% ROW ARPU as % of NA 13% 10% 11% 10% 10% CAGR ( ) CAGR ( ) CAGR ( ) Revenue 27.6% Revenue 32.3% Revenue 19.9% EBITDA 26.5% EBITDA 31.9% EBITDA 14.9% GAAP EPS 26.9% GAAP EPS 34.2% GAAP EPS 10.3% Current Price $75 Current Price $75 Current Price $75 Implied EV / fwd Revenue 12.5x Implied EV / fwd Revenue 12.4x Implied EV / fwd Revenue 13.6x Implied EV / fwd EBITDA (w/ SBC) 31.0x Implied EV / fwd EBITDA (w/ SBC) 30.7x Implied EV / fwd EBITDA (w/ SBC) 36.5x Price / fwd FCF 54.5x Price / fwd FCF 54.0x Price / fwd FCF 62.5x Price / fwd non-gaap EPS 39.0x Price / fwd non-gaap EPS 38.7x Price / fwd non-gaap EPS 44.1x Scenario Price Target $90 Scenario Price Target $125 Scenario Price Target $45 Implied EV / fwd Revenue 11.5x Implied EV / fwd Revenue 15.5x Implied EV / fwd Revenue 6.3x Implied EV / fwd EBITDA (w/ SBC) 26.2x Implied EV / fwd EBITDA (w/ SBC) 35.0x Implied EV / fwd EBITDA (w/ SBC) 15.9x Price / fwd FCF 45.8x Price / fwd FCF 61.0x Price / fwd FCF 28.7x Price / fwd non-gaap EPS 33.1x Price / fwd non-gaap EPS 43.9x Price / fwd non-gaap EPS 20.1x 15

16 Exhibit 38 Facebook DCF Driven Fair Market Value Facebook Model (USD millions) 2015E 2016E 2017E Fair Market Value DCF Valuation Assumptions Cost of Equity 11.0% Consolidated Asset Value $254,143.8 $272,723.9 $290,882.4 Cost of Debt 3.0% Marginal Tax-Rate 25.0% Plus: LT Debt / Total Cap 15.0% Unconsolidated Assets $0.0 $0.0 $0.0 WACC 9.7% Total Asset Value $254,143.8 $272,723.9 $290,882.4 LT Growth Rate 2.5% Less: Debt (year end) $0.0 $0.0 $0.0 Terminal Value as % of EV 63% Plus: Cash (year end) $10,408.2 $17,765.6 $28,525.7 Marketable securities (year end) $5,251.0 $5,251.0 $5,251.0 Total Fair Market Value $269,803.0 $295,740.5 $324,659.1 YE Fully Diluted shares 3, , ,188.4 Total FMV per share $87 $94 $102 Upside to current price 16.6% 25.8% 35.8% Supplemental Information Implied asset multiples Total adj. EBITDA $10,301.5 $13,862.7 $17,915.3 Total Asset Value / Concurrent EBITDA 24.7x 19.7x 16.2x Total fwd adj. EBITDA $13,862.7 $17,915.3 $22,062.2 Total Asset Value / fwd EBITDA 18.3x 15.2x 13.2x 16

17 Exhibit 39 Facebook Trading Multiples Morgan Stanley Facebook Multiples Current Price Target Price (USD millions) 2014E 2015E 2016E 2014E 2015E 2016E Trading Multiple Analysis Facebook - Stock Price $74.99 $74.99 $74.99 $90.00 $90.00 $90.00 Common Stock - Dilutive Shares Out. 3, , , , , ,134.5 Total Market Value $228,532.2 $231,346.6 $235,057.5 $274,275.3 $277,653.0 $282,106.6 Plus: Debt $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Less: Cash and cash equivalents $5,575.1 $10,408.2 $17,765.6 $5,575.1 $10,408.2 $17,765.6 Short-term investments 5, , , , , ,251.0 Consolidated Enterprise Value $217,706.1 $215,687.4 $212,040.9 $263,449.2 $261,993.8 $259,090.0 Revenue $12,412.2 $17,400.5 $22,703.2 $12,412.2 $17,400.5 $22,703.2 EV / Revenue 17.5x 12.4x 9.3x 21.2x 15.1x 11.4x Forward Revenue $17,400.5 $22,703.2 $27,837.1 $17,400.5 $22,703.2 $27,837.1 EV / Forward Revenue 12.5x 9.5x 7.6x 15.1x 11.5x 9.3x EBITDA (after SBC) $6,330.4 $7,022.1 $9,986.9 $6,330.4 $7,022.1 $9,986.9 EV / EBITDA 34.4x 30.7x 21.2x 41.6x 37.3x 25.9x Forward EBITDA (after SBC) $7,022.1 $9,986.9 $13,225.3 $7,022.1 $9,986.9 $13,225.3 EV / Forward EBITDA 31.0x 21.6x 16.0x 37.5x 26.2x 19.6x Unlevered FCF $4,395.3 $4,181.5 $6,040.0 $4,395.3 $4,181.5 $6,040.0 EV / Unlevered FCF 49.5x 51.6x 35.1x 59.9x 62.7x 42.9x Forward Unlevered FCF $4,181.5 $6,040.0 $8,261.7 $4,181.5 $6,040.0 $8,261.7 EV / Fwd. Unlevered FCF 52.1x 35.7x 25.7x 63.0x 43.4x 31.4x FCF / share $1.60 $1.38 $1.97 $1.60 $1.38 $1.97 P / FCF 46.8x 54.5x 38.1x 56.2x 65.4x 45.8x Fwd FCF / share $1.38 $1.97 $2.67 $1.38 $1.97 $2.67 P / fwd FCF 54.5x 38.1x 28.1x 65.4x 45.8x 33.7x GAAP EPS $1.06 $0.79 $1.42 $1.06 $0.79 $1.42 P / E 70.5x 94.9x 52.9x 84.6x 113.9x 63.5x Forward GAAP EPS $0.79 $1.42 $2.18 $0.79 $1.42 $2.18 P / fwd E 94.9x 52.9x 34.5x 113.9x 63.5x 41.4x Non-GAAP EPS $1.71 $1.92 $2.72 $1.71 $1.92 $2.72 P / E 43.9x 39.0x 27.6x 52.7x 46.8x 33.1x Forward non-gaap EPS $1.92 $2.72 $3.68 $1.92 $2.72 $3.68 P / fwd E 39.0x 27.6x 20.4x 46.8x 33.1x 24.5x 17

18 Exhibit 40 Facebook Annual Income Statement Morgan Stanley Facebook model (USD millions) E 2015E 2016E 2017E 2018E Income Statement Advertising revenue $4,279.0 $6,986.0 $11,432.5 $16,358.4 $21,536.1 $26,580.2 $31,512.9 Payments/other revenue , , , ,363.6 Total net revenue $5,089.0 $7,872.0 $12,412.2 $17,400.5 $22,703.2 $27,837.1 $32,876.6 Cost of revenue (ex-sbc) 1, , , , , , ,849.3 Gross profit $3,818.0 $6,039.0 $10,340.3 $14,442.4 $18,957.1 $23,522.4 $28,027.3 Gross margin 75.0% 76.7% 83.3% 83.0% 83.5% 84.5% 85.3% Sales and marketing (ex-sbc) $586.0 $856.0 $1,315.7 $2,088.1 $2,610.9 $2,950.7 $3,238.3 Research and development (ex-sbc) , , , , ,109.6 General and administrative (ex-sbc) , , , ,120.5 Stock-based compensation 1, , , , , ,863.7 Non-recurring items Depreciation and amortization (included in expense lines) , , , , , ,503.4 Total operating expenses (GAAP) 3, , , , , , ,332.2 Operating income (GAAP) $538.0 $2,804.0 $5,089.5 $4,985.9 $7,475.8 $10,216.8 $12,695.1 GAAP operating margin 10.6% 35.6% 41.0% 28.7% 32.9% 36.7% 38.6% Adjusted EBITDA $2,910.0 $4,814.0 $8,083.3 $10,301.5 $13,862.7 $17,915.3 $22,062.2 Adj. EBITDA margin 57.2% 61.2% 65.1% 59.2% 61.1% 64.4% 67.1% Incremental adj. EBITDA margin 44.0% 68.4% 72.0% 44.5% 67.2% 78.9% 82.3% EBITDA $1,187.0 $3,815.0 $6,330.4 $7,022.1 $9,986.9 $13,225.3 $16,198.5 EBITDA margin 23.3% 48.5% 51.0% 40.4% 44.0% 47.5% 49.3% Incremental EBITDA margin (64.8%) 94.4% 55.4% 13.9% 55.9% 63.1% 59.0% Interest & other income/(expense), net (GAAP) (44.0) (50.0) (66.8) Pre-tax income (GAAP) , , , , , ,989.0 Income tax provision/(benefit) (GAAP) , , , , , ,094.2 Tax rate (GAAP) 89.3% 45.5% 42.7% 51.8% 41.6% 33.8% 31.5% Net income (GAAP) $53.0 $1,500.0 $2,876.4 $2,409.0 $4,412.3 $6,885.3 $8,894.8 EPS (GAAP) $0.02 $0.60 $1.06 $0.79 $1.42 $2.18 $2.76 Average basic shares 2,006 2,420 2,645 3,021 3,080 3,128 3,179 Average diluted shares 2,166 2,517 2,704 3,050 3,111 3,163 3,220 Period-end basic shares (balance sheet) 2,372 2,547 2,986 3,056 3,103 3,153 3,205 Period-end fully diluted shares (for market cap) 2,532 2,644 3,048 3,085 3,135 3,188 3,246 Reconciliations GAAP to non-gaap Net income (GAAP) $53.0 $1,500.0 $2,876.4 $2,409.0 $4,412.3 $6,885.3 $8,894.8 Stock-based compensation 1, , , , , ,863.7 Amortization of intangibles Non-recurring items Income tax adjustments ($457.0) ($298.0) ($318.8) ($528.4) ($527.6) ($597.1) ($224.3) Net income (adjusted) $1,397.0 $2,346.0 $4,618.1 $5,867.1 $8,451.7 $11,634.2 $15,144.4 EPS (adjusted non-gaap) $0.64 $0.93 $1.71 $1.92 $2.72 $3.68 $

19 Exhibit 41 Facebook Quarterly Income Statement Morgan Stanley Facebook model E (USD millions) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Income Statement Advertising revenue $1,245.0 $1,599.0 $1,798.0 $2,344.0 $2,265.0 $2,676.0 $2,957.0 $3,534.5 Payments/other revenue Total net revenue $1,458.0 $1,813.0 $2,016.0 $2,585.0 $2,502.0 $2,910.0 $3,203.0 $3,797.2 Cost of revenue (ex-sbc) Gross profit $1,054.0 $1,359.0 $1,521.0 $2,105.0 $2,054.0 $2,453.0 $2,655.0 $3,178.3 Gross margin 72.3% 75.0% 75.4% 81.4% 82.1% 84.3% 82.9% 83.7% Sales and marketing (ex-sbc) $175.0 $235.0 $197.0 $249.0 $276.0 $302.0 $320.0 $417.7 Research and development (ex-sbc) General and administrative (ex-sbc) Stock-based compensation Non-recurring items Depreciation and amortization (included in expense lines) Total operating expenses (GAAP) , , ,950.7 Operating income (GAAP) $373.0 $562.0 $736.0 $1,133.0 $1,075.0 $1,390.0 $1,397.0 $1,227.5 GAAP operating margin 25.6% 31.0% 36.5% 43.8% 43.0% 47.8% 43.6% 32.3% Adjusted EBITDA $796.0 $1,024.0 $1,261.0 $1,733.0 $1,638.0 $1,969.0 $2,050.0 $2,426.3 Adj. EBITDA margin 54.6% 56.5% 62.5% 67.0% 65.5% 67.7% 64.0% 63.9% Incremental adj. EBITDA margin 50.3% 58.8% 74.3% 77.3% 80.7% 86.1% 66.5% 57.2% EBITDA $606.0 $792.0 $1,010.0 $1,407.0 $1,339.0 $1,647.0 $1,686.0 $1,658.4 EBITDA margin 41.6% 43.7% 50.1% 54.4% 53.5% 56.6% 52.6% 43.7% Incremental EBITDA margin 28.8% 221.9% 60.6% 66.0% 70.2% 77.9% 57.0% 20.7% Interest & other income/(expense), net (GAAP) (20.0) (17.0) (10.0) (3.0) 0.0 (4.0) (61.0) (1.8) Pre-tax income (GAAP) , , , , ,225.7 Income tax provision/(benefit) (GAAP) Tax rate (GAAP) 38.0% 38.9% 41.5% 53.7% 40.3% 42.9% 39.7% 48.0% Net income (GAAP) $219.0 $333.0 $425.0 $523.0 $642.0 $791.0 $806.0 $637.4 EPS (GAAP) $0.09 $0.13 $0.17 $0.20 $0.25 $0.30 $0.30 $0.22 Average basic shares 2,386 2,407 2,430 2,458 2,545 2,560 2,587 2,887 Average diluted shares 2,499 2,502 2,528 2,558 2,609 2,615 2,644 2,948 Period-end basic shares (balance sheet) 2,411 2,431 2,453 2,547 2,564 2,575 2,788 2,986 Period-end fully diluted shares (for market cap) 2,524 2,526 2,551 2,644 2,628 2,630 2,845 3,048 Reconciliations GAAP to non-gaap Net income (GAAP) $219.0 $333.0 $425.0 $523.0 $642.0 $791.0 $806.0 $637.4 Stock-based compensation Amortization of intangibles Non-recurring items Income tax adjustments ($97.0) ($77.0) ($55.0) ($69.0) ($56.0) ($22.0) ($80.0) ($160.8) Net income (adjusted) $345.0 $524.0 $658.0 $819.0 $926.0 $1,132.0 $1,149.0 $1,411.1 EPS (adjusted non-gaap) $0.14 $0.21 $0.26 $0.32 $0.35 $0.43 $0.43 $