ab                                                                                                                       ...
Key Call: Google Inc. 6 December 2010Update: Product Listing Ads Remain Prevalent We recently ran searches on a basket of ...
Key Call: Google Inc. 6 December 2010We drilled down a bit on specific verticals: categories with the highestpenetration o...
Key Call: Google Inc. 6 December 2010Google eCommerce Coverage Still Trending at 97%+Through Q4Our proprietary system of c...
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
12 06 10-10 02 14 am
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12 06 10-10 02 14 am

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  1. 1. ab Global Equity Research Americas Internet Services UBS Investment Research 12-month rating Buy Key Call: Google Inc. Unchanged 12m price target US$720.00 Unchanged Reiterate Buy; Positive Trends Continue… Price US$573.00 Solid CPC Growth; Proprietary Checks Show Image Ads Still Prevalent RIC: GOOG.O BBG: GOOG US Search Engine Marketer, Efficient Frontier, recently noted strong CPC increases in 6 December 2010 November: Finance (+10% Y/Y); Retail (+6%); Automotive (+24%) and Travel (+37%). Also, per our proprietary processes, Product Listing Ads remain prevalent Trading data – across our database of 100K+ commercial keywords, 10% had a product image 52-wk range US$626.77-436.07 advertisement (see charts 1& 2 inside). Overall coverage trends (i.e. a query with Market cap. US$138bn any sponsored advertisement) remained positive with commercial queries at 97%+. Shares o/s 240m (COM) Free float 50% Drill Down on Product Listing Ads by Vertical Avg. daily volume (000) 3,149 Drilling down a bit on specific verticals: categories with the highest penetration of Avg. daily value (m) US$1,775.2 Product Listing Ads were: Home & Garden (~21%); Clothing & Shoes (~17%); Animals (~12%); Food & Restaurants (~11%); and Sports & Recreation (~10%). Balance sheet data 12/10E Penetration across these top 5 categories alone was 17% (weighted average), with Shareholders equity US$45.7bn these 5 categories accounting for roughly 36% of the 100,000+ database keywords. P/BV (UBS) 4.0x Our thoughts on NY real estate purchase and impending eBookstore Net Cash (debt) US$14.8bn The Wall Street Journal reported that Google has tentatively agreed to purchase Forecast returns 111 8th Ave (New York) for $1.9B. The asset is one of the primary internet Forecast price appreciation +25.7% gateways in NY and resides directly on top of the 8th Ave fiber line, thereby reducing latency to a minimum. In addition, Google is set to launch its e-book store Forecast dividend yield 0.0% (per WSJ), Google Editions. The company is likely to differentiate Google Forecast stock return +25.7% Editions by offering open format books that can be read across multiple devices. Market return assumption 5.5% Forecast excess return +20.2% Valuation: Our $720 PT is based on our DCF (12% WACC, 3.5% LTGR) Our PT implies 18x ’11E EPS (ex $104/shr in cash + mkt securities). EPS (UBS, US$) 12/10E 12/09 UBS Cons. Actual Q1 6.76 6.76 5.16 Q2 6.45 6.45 5.36 Q3 7.64 7.64 5.89 Highlights (US$k) 12/08 12/09 12/10E 12/11E 12/12E Q4E 8.09 7.99 6.79 Revenues 15,856,598 17,481,147 21,832,318 25,786,287 29,506,397 12/10E 28.90 28.78 EBIT (UBS) 7,941,935 9,476,240 11,731,736 13,714,252 15,982,046 12/11E 33.67 33.31 Net Income (UBS) 6,283,673 7,416,493 9,335,113 10,880,154 12,717,342 EPS (UBS, US$) 19.79 23.02 28.90 33.67 39.35 Performance (US$) Net DPS (UBS, US$) 0.00 0.00 0.00 0.00 0.00 800 Stock Price (US$) Rel. S & P 500 160 700 140 Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12E 600 120 500 100 EBIT margin % - 54.2 53.7 53.2 54.2 400 80 ROIC (EBIT) % - 42.0 41.8 45.2 53.4 300 60 200 40 EV/EBITDA (core) x - 8.9 9.9 8.2 7.1 100 20 PE (UBS) x - 19.1 19.8 17.0 14.6 0 0 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 Net dividend yield % - 0.0 0.0 0.0 0.0 Price Target (US$) (LHS) Stock Price (US$) (LHS) Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for Rel. S & P 500 (RHS) abnormal and economic items at the analysts judgement. Source: UBS Valuations: based on an average share price that year, (E): based on a share price of US$573.00 on 03 Dec 2010 19:38 EST www.ubs.com/investmentresearch Brian Pitz Brian Fitzgerald Kaizad Gotla, CFA Analyst Analyst Associate Analyst brian.pitz@ubs.com brian.fitzgerald@ubs.com kaizad.gotla@ubs.com +1-212-713 9310 +1-212-713 2851 +1-212-713 2603 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 14. UBS does and seeks to do business with companies covered in its research reports. As a 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.
  2. 2. Key Call: Google Inc. 6 December 2010Update: Product Listing Ads Remain Prevalent We recently ran searches on a basket of 100,000+ commercial keywords onGoogle and found ~10% of all search result pages yielded a product imageadvertisement (a ‘Google Product Listing Ad’) in the sponsored listings (seechart 1). The program is currently in Beta, with the program expanding to moremerchants and users over time.Our checks suggest these product ads have significantly higher (+40-50%) betterclick-through rates than conventional text sponsored listings. These ads aremonetized on a CPA or Cost-Per-Action basis, though we see the potential forblended monetization techniques (CPA, CPM, CPC, etc). We believe ProductImage Ads create a more engaging user experience by including richer productinformation (product image, price, and merchant name), while also making iteasy for merchants to promote their broader catalogs / product lines on Google.Product Listing Ads -- What They DoProduct Listing Ads are search ads that include richer product information -including product image, price, and merchant name - without requiringadditional keywords or ad text. Whenever a user enters a search query relevantto an item in a Google Merchant Center account, Google may automaticallyshow the most relevant products along with the associated image, price andproduct name.Product Listing Ads are charged on a cost-per-action (CPA) basis, which meansthat the advertiser only pays when a user clicks on the ad and completes apurchase (i.e. coverts). As these ads monetize further down consumer purchasefunnel, CPA rates are higher than typical CPC rates.Chart 1: Example of Google Product AdsSource: Google UBS 2
  3. 3. Key Call: Google Inc. 6 December 2010We drilled down a bit on specific verticals: categories with the highestpenetration of Product Listing Ads were: Home & Garden (~21%); Clothing& Shoes (~17%); Animals (~12%); Food & Restaurants (~11%); andSports & Recreation (~10%). Penetration across these top 5 categories alonewas 17% (weighted average), with these 5 categories accounting for roughly36% of the 100,000+ keywords in the database.Chart 2: Penetration of Google Product Listing Ads by Key Verticals Number of Keywords w/ a % of Keywords w/ Category Keywords Product Image Ad Product Image Ad 1 Home_&_Garden 16,781 3,587 21% 2 Clothing_&_S hoes 8,389 1,390 17% 3 Animals 898 105 12% 4 Food_&_Restaurants 4,595 519 11% 5 Sports_&_Recreation 5,618 586 10% 6 Computers_&_Electronics 9,543 749 8% 7 Health_&_Wellness 9,833 641 7% 8 Arts_&_Entertainment 7,538 473 6% 9 Beauty_&_Personal_Care 6,182 346 6% 10 Society_&_Culture 3,936 197 5% 11 Science,_Social_Sciences_&_Humanities 3,645 168 5% 12 Vehicles 4,287 193 5% 13 Business 4,889 218 4% 14 Travel_&_Lodging 7,402 229 3% 15 Families_&_Relationships 3,132 65 2% 16 Education_&_Instruction 3,332 55 2% Top 5 Sum 36,281 6,187 Top 5 Weighted Average 17% Total Sum 100,000 9,521 Total Weighted Average 10%Source: UBS Internet Research UBS 3
  4. 4. Key Call: Google Inc. 6 December 2010Google eCommerce Coverage Still Trending at 97%+Through Q4Our proprietary system of checking Google coverage indicates coverage acrossour very broad basket of keywords (which also includes the top daily words outof Google Trends) has been trending as expected through Q4. Note, when werun a basket of 24,000+ eCommerce oriented keywords, coverage is -- asexpected – greater than 97%. For commercially viable queries/keywords, thecoverage has run begun to run ‘deeper’ as there are more than the traditional 10sponsored links on the right column as hybrid ads continue to be deployed (casein point – search for “Xbox 360”).Chart 3: Coverage on Google US (www.google.com) Across 24,000+ Commercially Oriented Keywords Total Keywords With an Ad / Total Keyword US Coverage (24K keywords) Checked 100.00% 95.00% Coverage 90.00% 85.00% 80.00% 75.00% 1/2 10 2/4 0 2/1 10 3/4 0 3/1 10 4/1 0 4/1 /10 4/2 10 5/1 0 5/2 10 6/1 0 6/2 10 7/8 0 7/2 /10 8/5 0 8/1 /10 9/2 0 9/1 /10 9/3 10 1 0 /1 0 10 5/09 11 /09 11 /09 12 /09 12 /09 1/7 9 10 /10 11 /10 11 1/10 /10 /0 1 /1 8 /1 8 /1 9 /1 7 /1 4 /1 2 /1 9 /1 / / / 5/ 3/ 0/ 6/ /29 /12 /26 /10 /24 0 /14 /28 /25 /1 /1 10Source: UBS Internet Research UBS 4

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