The Top Ten Internet Trends in 2013


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The Top Ten Internet Trends in 2013

  1. 1. EQUITY I RESEARCHAd Age Digital Conference 2013The Top Ten Internet Trends in 2013RBC Capital Markets, LLCMark S. Mahaney (Analyst) (415) 633-8608 mark.mahaney@rbccm.comAndré Séquin (Analyst) (212) 618-7688 andre.sequin@rbccm.comBrian Peak (Associate) (212) 548-3183 brian.peak@rbccm.comKevin Potterton (Associate) (212) 428-6489 kevin.potterton@rbccm.comApril 16, 2013This report is priced as of market close April 9, 2013 EST.All values in U.S. dollars unless otherwise noted.For Required Conflicts Disclosures, please see page 34.
  2. 2. AgendaI. Internet Sector Coverage & CompsII. GOOG and FB Drill DownIII. 2013 U.S. Internet Sector OutlookIV. Top 10 Internet Trends in 2013V. RBC’s Top 3 Internet Stock Picks…GOOG, PCLN, AMZNMark S. Mahaney (Analyst) (415) 633-8608 2André Séquin (Analyst) (212) 618-7688
  3. 3. Internet Sector Coverage & Comps
  4. 4. Internet Sector Coverage Company Name Ticker Price Rating Target Price Active Network ACTV $4.16 OP $8 Amazon AMZN $261.14 OP $330 Angies List ANGI $19.34 SP $18 AOL AOL $39.28 OP $45 Bankrate RATE $11.75 SP $11 Blue Nile NILE $32.28 OP $38 Demand Media DMD $8.23 OP $13 eBay EBAY $56.07 OP $64 Expedia EXPE $62.43 SP $73 Facebook FB $26.59 OP $32 Google GOOG $777.65 OP $950 Groupon GRPN $5.94 SP $5 IAC/InterActiveCorp IACI $44.50 OP $56 Liquidity Services LQDT $33.07 OP $46 LinkedIn LNKD $172.07 SP $190 Marchex MCHX $4.01 SP $4 Netflix NFLX $169.36 OP $210 Priceline PCLN $696.13 OP $900 Shutterstock SSTK $42.53 OP $35 TripAdvisor TRIP $48.29 SP $45 Trulia TRLA $31.80 OP $41 Velti VELT $1.92 SP $3 WWWW $16.55 OP $20 Yahoo! YHOO $23.83 OP $24 Yelp YELP $24.62 SP $26 Zillow Z $54.14 OP $60 Source: RBC Capital Markets *VELT, MCHX, and Z are rated Speculative RiskMark S. Mahaney (Analyst) (415) 633-8608 4André Séquin (Analyst) (212) 618-7688
  5. 5. Sector Coverage Comps TableComparable Valuation Analysis(in millions, except per share amounts) Shares Market Adjusted P/E EV/EBITDA FCF/EV YieldCompany Ticker Price Outstanding Cap (USD) EV (USD) FY13E FY13E FY13EActive Network, Inc. ACTV $4.16 60.42 251.36 192.87 N/M 3.8x, Inc. AMZN $261.14 461.00 120,385.54 112,021.54 89.5x 20.0x 3.9%Angies List Inc. ANGI $19.34 57.89 1,119.57 1,091.80 N/M N/M N/MAOL Inc. AOL $39.28 88.10 3,460.57 2,993.97 27.0x 7.1x 9.1%Bankrate, Inc. RATE $11.75 100.10 1,176.19 1,286.55 24.0x 11.5x 4.8%Blue Nile, Inc. NILE $32.28 12.76 411.80 324.78 29.5x 13.0x 8.3%Demand Media, Inc. DMD $8.23 88.44 727.89 624.96 21.2x 5.5x 6.9%eBay, Inc. EBAY $56.07 1,318.00 73,900.26 65,967.26 20.5x 12.4x 4.7%Expedia, Inc. EXPE $62.43 140.76 8,787.40 8,396.12 19.4x 9.3x 11.9%Facebook, Inc. FB $26.59 2,506.00 66,634.54 52,708.54 48.4x 14.4x 3.0%Google Inc. GOOG $777.65 334.98 260,494.86 220,931.86 17.0x 9.8x 6.6%Groupon, Inc. GRPN $5.94 655.68 3,894.73 2,685.44 56.5x 8.8x 1.1%IAC/InterActiveCorp IACI $44.50 94.27 4,194.88 4,020.14 11.8x 6.2x 11.7%Liquidity Services, Inc. LQDT $33.07 33.05 1,093.10 1,047.21 15.1x 8.1x 7.8%LinkedIn Corp. LNKD $172.07 114.10 19,632.33 18,882.78 134.3x 53.9x 0.7%Marchex, Inc. MCHX $4.01 40.37 161.90 31.37 25.0x 2.4x 18.9%Netflix, Inc. NFLX $169.36 62.38 10,564.51 10,113.22 75.7x 34.1x Inc. PCLN $696.13 51.47 35,829.81 31,701.09 17.8x 12.7x 6.1%Shutterstock, Inc. SSTK $42.53 32.68 1,389.95 1,287.85 57.9x 28.3x 2.7%TripAdvisor Inc. TRIP $48.29 144.15 6,960.91 6,854.32 27.3x 17.0x 4.4%Trulia, Inc. TRLA $31.80 27.33 869.04 775.47 196.7x 65.9x 0.8%Velti plc VELT $1.92 66.00 126.71 118.33 N/M 10.6x WWWW $16.55 50.00 827.50 1,499.86 8.4x 9.7x 6.7%Yahoo! Inc. YHOO $23.83 1,130.00 26,927.90 10,052.28 20.8x 6.1x 7.4%Yelp Inc. YELP $24.62 63.02 1,551.43 1,456.31 242.8x 66.5x 0.2%Zillow Inc. Z $54.14 36.29 1,964.85 1,814.81 196.4x 51.8x 1.6%Source: Company reports and RBC Capital Markets estimatesMark S. Mahaney (Analyst) (415) 633-8608 5André Séquin (Analyst) (212) 618-7688
  6. 6. GOOG and FB Drill Down
  7. 7. GOOG: Diminished Mobile Bear Thesis CPC Trends 20% 15% 12% 8% 10% 5% YoY Growth 5% 0% -5% Q1:11A Q2:11A Q3:11A Q4:11A Q1:12A Q2:12A Q3:12A Q4:12A -10% -6% -8% -15% -12% -20% -16% -15% CPC declines and Paid Clicks growth have moderated in recent quarters Paid Clicks Growth 50% 45% 42% 39% 40% 34% 33% 35% YoY Growth 28% 30% 24% 25% 18% 18% 20% 15% 10% 5% 0% Q1:11A Q2:11A Q3:11A Q4:11A Q1:12A Q2:12A Q3:12A Q4:12ASource: RBCCM Estimates, Company ReportsMark S. Mahaney (Analyst) (415) 633-8608 7André Séquin (Analyst) (212) 618-7688
  8. 8. FB: Emerging Mobile Bull Thesis As Mobile Ad Revenue Has Grown… 1,400 1,200 $306 $45 $152 1,000 $ MM 800 600 $947 $1,023 $871 $934 400 200 0 Q1:12 Q2:12 Q3:12 Q4:12 Desktop Ad Revenue Mobile Ad Revenue … Engagement Trends Remain Steady 75% 70.5% 70.4% 70.5% 69.9% 69.8% 69.9% 70.0% 69.2% 70% 64.4% 65% 58.4% 58.5% 59.2% 57.8% 58.1% 60% 57.1% 57.2% 56.4% 54.5% 55% 50% Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12 Q1:13E DAU/MAU Ratio Worldwide DAU/MAU Ratio US & CanadaSource: RBCCM Estimates, Company ReportsMark S. Mahaney (Analyst) (415) 633-8608 8André Séquin (Analyst) (212) 618-7688
  9. 9. 2013 U.S. Internet Sector Outlook
  10. 10. U.S. Online Advertising – 15%+ Growth in ’13…Thanks to SoLoMoVo* ($ in MM) 2009 2010 2011 2012E 2013E 2014E Total U.S. Advertising $162,024 $166,600 $171,750 $178,620 $183,979 $189,498 Y/Y Change -15% 3% 3% 4% 3% 3% U.S. Online Advertising $22,661 $26,041 $31,735 $36,963 $42,508 $48,034 Y/Y Change -3% 15% 22% 16% 15% 13% Internet as % of Total 14% 16% 18% 21% 23% 25% Y/Y Incr. in Penetration (bps) 181 164 285 222 241 224 Source: RBCCM Estimates, Magna Global *Social, Local, Mobile, VideoMark S. Mahaney (Analyst) (415) 633-8608 10André Séquin (Analyst) (212) 618-7688
  11. 11. U.S. Online Retail – 15%+ Growth in ’13…Upside Due to Mobile & SDD*($ in B) 2009 2010 2011 2012A 2013E 2014ETotal U.S. Retail* $1,743 $1,803 $1,916 $2,011 $2,091 $2,186Y/Y Change -5.4% 3.5% 6.3% 5.0% 4.0% 4.5%Total U.S. Online Retail Sales $143 $166 $194 $225 $258 $292Y/Y Change 0.8% 16.0% 16.6% 15.9% 15.0% 13.0%Online As % of Total U.S. Retail* 8% 9% 10% 11% 12% 13%Y/Y Incr. in Penetration (bps) 50 99 90 106 118 100 *Excludes Auto, Gas, Food, and Health & Personal Care Source: RBCCM Estimates, Department of Commerce *Same Day DeliveryMark S. Mahaney (Analyst) (415) 633-8608 11André Séquin (Analyst) (212) 618-7688
  12. 12. U.S. Online Travel – High Single Digit Growth in 2013…Maturing ($ in MM) 2009 2010 2011 2012E 2013E 2014E U.S. Leisure Travel Sales $160,228 $172,217 $183,393 $192,562 $201,228 $211,289 Y/Y Change -10% 7% 6% 5% 4% 5% U.S. Online Travel Sales $89,343 $99,069 $108,540 $117,417 $125,828 $135,225 Y/Y Change -6% 11% 10% 8% 7% 7% Online as % of Total 56% 58% 59% 61% 63% 64% Y/Y Incr. in Penetration (bps) 239 177 166 179 155 147 Source: RBCCM Estimates, PhocusWrightMark S. Mahaney (Analyst) (415) 633-8608 12André Séquin (Analyst) (212) 618-7688
  13. 13. What The “Almighty 2nd Derivative” Says About Online Penetration… Growth of Online Retail Sales as a Percent of Total Retail 14% 14% 175 175 12% 12% 150 150 Y/Y Incr. in Penetration (bps) Y/Y Incr. in Penetration (bps) Online As % of Retail Online As % of Retail 10% 10% 125 125 8% 8% 118 118 100 100 99 104 106 6% 99 75 6% 90 90 75 4% 4% 50 50 50 50 2% 2% 25 25 0% 0% 0 0 2009 2009 2010 2010 2011 2011 2012E 2012A 2013E Online As %%of Total U.S. Retail (Adj.)* Online As of Total U.S. Retail* Y/Y Incr. inin Penetration (bps) Y/Y Incr. Penetration (bps) *Excludes Auto, Gas, Food, and Health & Personal Care Source: RBCCM Estimates, Department of CommerceMark S. Mahaney (Analyst) (415) 633-8608 13André Séquin (Analyst) (212) 618-7688
  14. 14. The Unit Growth Potential That Secular Growth Begets*** Unit Growth at a Sampling of Internet Companies in Q3:12 100% 90% 87% 82% 80% 80% 68% 70% YoY Growth 60% 54% 52% 50% 39% 40% 37% 36% 33% 30% 20% 10% 0% L NKD YEL P Z (P r A NGI P ( Li TR LA A MZN GR PN PC LN GO O (C or p (Bus i emie (P aid s tene (A ge (Unit (A ct i (Roo G (Pa orate ness r Ag e Mem r Hou nt Su s Shi ve C u m Ni id Cl C ust A cc o nt S u bers h rs) bs ) pped st om g hts ) i ck s) omer unt s) bs) ips) ) ers ) s) *** Assuming effective management, market share gains, successful product innovation, etc… Source: RBCCM, Company ReportsMark S. Mahaney (Analyst) (415) 633-8608 14André Séquin (Analyst) (212) 618-7688
  15. 15. The Top 10 Internet Trends In 2013
  16. 16. 1. International Recovery…The Implications Of “Less Worse” Overseas Markets Growth in Core Euro Area Countries International Revenue Exposure 100% 8 90% 81% 6 80% 4 70% 2 56%YoY Growth 60% 53% 52% 0 49% 49% 50% 43% 43% -2 1 40% 32% -4 30% 30% -6 20% -8 10% 10% -10 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 PCLN GRPN GOOG EBAY FB TRIP AMZN EXPE YHOO IACI AOL GER EA FRA NED Source: RBC Europe Limited Jens Larsen, Haver Analytics, Company Reports Stock Plays: AMZN, EBAY, GOOG, and especially PCLN Mark S. Mahaney (Analyst) (415) 633-8608 16 André Séquin (Analyst) (212) 618-7688
  17. 17. 2. Mobile Materiality Company Mobile Data Point Active Network ~20% of Traffic Comes Via Mobile eBay $13B in mobile GMV and $14B in mobile TPV in 2012 Google 1/3 of Total Queries Come Via Mobile LinkedIn 25% of Traffic Comes Via Mobile OpenTable 32% of Seated Diners Come Via Mobile Pandora 77% of Listener Hours Come Via Mobile WebMD 25% of Traffic Comes Via Mobile Facebook 23% of Ad Revenue Comes Via Mobile Expedia 20% of Transactions Come Via Mobile TripAdvisor 70% of Mobile Traffic Comes Via Tablet Mobile surpassed 10% of Online Retail Sales for the 1st time in Q4:12 (per ComScore) Mobile Devices account for ~13% of Web-Based Page Views (per ComScore) Source: RBCCM, Company Reports, ComScore Stock Plays: AMZN, EBAY, TRIPMark S. Mahaney (Analyst) (415) 633-8608 17André Séquin (Analyst) (212) 618-7688
  18. 18. 2. Mobile Materiality … Look 2 Percentage of Retail e-Commerce Dollars Spent via Mobile 14% 13% 12% 10% 10% 9% 9% 8% 8% 8% 6% 6% 6% 4% 2% 0% Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12E Source: ComScore Stock Plays: AMZN, EBAYMark S. Mahaney (Analyst) (415) 633-8608 18André Séquin (Analyst) (212) 618-7688
  19. 19. 2. Mobile Materiality … Look 3 Growth of EBAY Mobile GMV and Mobile TPV 16 10% of TPV 14 17% of GMV 12 Billion USD 10 8 $14B 7% of GMV $13B 6 3% of TPV 4 3% of GMV 1% of TPV $5B 2 $4B $2.0B $0.75B 0 2010 2011 2012 Mobile GMV Mobile TPV Source: RBCCM, Company Reports Stock Plays: EBAYMark S. Mahaney (Analyst) (415) 633-8608 19André Séquin (Analyst) (212) 618-7688
  20. 20. 3. Tablet Traction…Mobile, But Without The CPM/CPC Dilution… Share of Web Traffic by Smartphone, Tablet 14% 12% Share of Web-Based Page Views 4.5% 4.7% 10% 4.2% 4.3% 4.5% 4.0% 8% 3.6% 3.5% 3.0% 3.2% 2.8% 6% 2.4% 2.2% 1.5% 1.8% 1.9% 2.0% 2.1% 4% 7.9% 8.3% 8.1% 7.6% 7.6% 6.9% 5.6% 6.1% 4.8% 5.1% 5.3% 5.4% 2% 4.1% 3.8% 4.0% 3.9% 4.0% 4.3% 0% Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Smartphone Tablet Source: ComScore Stock Plays: AMZN, EBAY, GOOG, TRIPMark S. Mahaney (Analyst) (415) 633-8608 20André Séquin (Analyst) (212) 618-7688
  21. 21. 4. Facebook Ubiquity…What 1B Served Means… Facebook Monthly Active User (MAU) Growth 1200 140% 1 billion users 120% 1000 100% 800 Million MAU 80% YoY Growth 600 60% 400 40% 200 20% 0 0% Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12 MAU Y/Y Growth Source: Company Reports Stock Plays: FB…With Negative Implications For AOL, YHOOMark S. Mahaney (Analyst) (415) 633-8608 21André Séquin (Analyst) (212) 618-7688
  22. 22. 5. Online Video Rampup…And The Migration Of TV Ad Budgets… Time Spent Watching Video Online/Mobile (Monthly) 13:6 12:24Hours:Minutes Per Month 11:11 2012E Global Ad Spend 10:25 10:09 Out of Home, 9:23 9:15 $33 Radio, 8:43 8:51 $33B 8:33 Magazines, $34B Television, $198B 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Newspapers, Time Spent Watching Traditional TV (Monthly) $84B 158:47 156:24 154:5 153:19 155:46 145:28 146:20 146:45 148:03 144:54 Hours:Minutes Per Month Internet, $98B 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Source: RBCCM, Nielsen, Magna Global Stock Plays: AMZN, AOL, FB, YHOO, and especially GOOGMark S. Mahaney (Analyst) (415) 633-8608 22André Séquin (Analyst) (212) 618-7688
  23. 23. 6. Same Day Delivery Surge…The ‘Net Coming To A Doorstep Near You Average Distance Between Nearest AMZN Fulfilment Top 50 US Cities by Population and AMZN Fulfilment Center and 50 Largest US Cities Center Locations 300 254 249 250 225 198 200(miles) 150 112 100 50 0 2009 2010 2011 2012 2013E Source: RBCCM, Company Reports Stock Plays: AMZN, With Negative Implications For EBAY Mark S. Mahaney (Analyst) (415) 633-8608 23 André Séquin (Analyst) (212) 618-7688
  24. 24. 7. Local Internet Adoption…The Final Frontier Annual Growth In Local Presence100% 35.5K Business 90% 26.7K Premier Accounts Agent Subscribers 80% 82% 80% 70% 33K Service 60% Providers 50% 52% 22.8K Agent 40% Subscribers 27.4MM Seated Diners 30% 22.1K Active 11.9MM Monthly 34% Advertisers Patch Visitors 20% 26% 18% 19% 10% 0% RLOC AOL OPEN TRLA ANGI Z YELP Source: RBCCM, Company Reports Stock Plays: AOL, GOOG, GRPN, TRIPMark S. Mahaney (Analyst) (415) 633-8608 24André Séquin (Analyst) (212) 618-7688
  25. 25. 8. Cloud Computing Critical Mass Cloud Computing Market Growth Forecast $250 $207 $200 17.3% CAGR $150 Billion USD $109 $91 $100 $50 $0 2011 2012E 2013E 2014E 2015E 2016E Source: Gartner press release Stock Plays: AMZN, GOOG…But The Negative Implications of 19-Year-Old Risk…Mark S. Mahaney (Analyst) (415) 633-8608 25André Séquin (Analyst) (212) 618-7688
  26. 26. 9. Alternative Payments Rollout…What Will Be In Your Wallet? Global Mobile Payment Volume Forecast $450 $400 $352.7 $350 $300 69% CAGR $255.8 Billion USD $250 $200 $171.5 $150 $105.9 $100 $58.9 $50 $25.6 $0 2009 2010 2011 2012E 2013E 2014E Source: Gartner press release Stock Plays: AMZN, GOOG, GRPN…And Especially EBAYMark S. Mahaney (Analyst) (415) 633-8608 26André Séquin (Analyst) (212) 618-7688
  27. 27. 10. The Cash Pileup…Implications For M&A And (Hopefully) Cash Returns… Company Acquisition Date Price 3Q Cash Balance 3Q Cash Balance Cash / Dividend ($MM) Market Cap (Current / Potential) Google Motorola Mobility 8/15/11 $12.5B $45.7B AMZN $5,248 4.3% Microsoft Skype 5/10/11 $8.5B $63.0B AOL $867 30.5% P eBay GSI Commerce 3/28/11 $2.4B $11.6B EBAY $11,635 16.8% P Priceline Kayak 11/8/12 $1.8B $4.7B EXPE $1,337 14.8% C Facebook Instagram 4/9/12 $1.0B $10.5B FB $10,452 13.2% GOOG $45,724 18.6% P Amazon Kiva Systems 3/19/12 $775M $5.2B GRPN $1,201 35.9% Expedia Trivago 12/21/12 $630M $1.3B IACI $561 12.9% C AOL HuffPo 2/7/11 $315M $867M PCLN $4,675 13.9% P IAC 8/26/12 $300M $641M TRIP $548 8.6% P YHOO $6,927 30.0% P Apple Quattro 1/4/10 $275M $121.25B Zynga OMGPop 3/21/12 $210M $1.4B Average $8,107 18.1% Yahoo! -- -- -- $6.9B Median $4,675 14.8% Source: Company Reports, Bloomberg Stock Plays: EBAY, EXPE, GOOG, IACI, PCLN, YHOOMark S. Mahaney (Analyst) (415) 633-8608 27André Séquin (Analyst) (212) 618-7688
  28. 28. Stock Plays Summary…The Beneficiaries Are…AMZN, EBAY, GOOG AMZN AOL EBAY EXPE FB GOOG GRPN IACI PCLN TRIP YHOOInternational RecoveryMobile MaterialityTablet TractionFacebook UbiquityOnline Video RampupSame Day Delivery SurgeLocal Internet AdoptionCloud Computing Critical MassAlternative Payments RolloutCash PileupBiggest Beneficiaries Source: RBCCM EstimatesMark S. Mahaney (Analyst) (415) 633-8608 28André Séquin (Analyst) (212) 618-7688
  29. 29. RBC’s Top 3 Large/Mid Cap Internet Stock Picks
  30. 30. Google (GOOG) OP, $950 Price TargetThe GOOG Long Thesis:1. Still Significant Secular Growth for Online Advertising – 20%ish global growth thanks to SoLoMoVo2. Very Strong Market Share in Core Search – 70%+ of global Search ad revenue3. Strong Market Share in Other Ad Segments – Display with YouTube & GDN, Mobile4. Significant Competitive Moats – $17B in capex and $13B in R&D over past 5 years5. One of the Best Management Teams on the Internet – excellent record of innovation & acquisition6. Reasonable Valuation – trades in line with growth rateGOOG Investment Risks Exposure to European macro slowdown Integrating MMI and moving into the hardware business (Nexus devices) Regulatory Concerns – though U.S. risks have recently abated Social Media sites gaining ad traction Price Target: Our $950 price target is based on a 18x P/E multiple on our 2014 estimatesMark S. Mahaney (Analyst) (415) 633-8608 30André Séquin (Analyst) (212) 618-7688
  31. 31. Priceline (PCLN) OP, $900 Price TargetThe PCLN Long Thesis:1. Still Significant Secular Growth for Online Travel – double-digit global bookings growth market2. Still Significant Hotel Market Share Potential – PCLN accounts for approx 5% of global hotel sales3. Sustainable Competitive Advantages in Europe – largest base of hotel partners and lowest commission rates4. Significant Growth opportunity in Asia and LatAm – via Agoda & properties5. One of the Best Management Teams on the Internet6. High Growth and High Quality EPS – high conversion into FCF7. Very Reasonable Valuation – discount to growth rate (18x 2013E P/E vs. 20%+ EPS CAGR through 2015)PCLN Investment Risks Significant Exposure to International Markets – 80% of revenue, with Europe 60% of revenue Inventory Access Challenges of Domestic Opaque Segment – Air and Rental Car Potential for Marketing Deleverage – given increased competition for Search keywords Risk of Google Disintermediation in Online Travel Price Target: Our $900 price target is based on a blended average of a 18x P/E Multiple, and a 13x EV/EBITDA multiple on our 2014 estimatesMark S. Mahaney (Analyst) (415) 633-8608 31André Séquin (Analyst) (212) 618-7688
  32. 32. Amazon (AMZN) OP, $330 Price TargetThe AMZN Long Thesis:1. Significant Secular Growth for Online Retail – 10% addressable market penetration rising 1% per year…2. Clear Amazon Market Share Gains and a Path for More of the Same – Mobile, SDD Surge…the Double- Double Thesis3. New Revenue Growth Opportunities – Consumer Staples, Amazon Web Services, International Expansion, Digital Media, Office/Industrial Supplies, Advertising Revenue…4. Material Margin Expansion Potential – from 3% level to historical average 6%...3rd party sales, AWS, scale5. One of the Best Management Teams on the Internet6. High Growth and High Quality EPS – high conversion into FCFAMZN Investment Risks: Intrinsically High Valuation “Media Hole” – transition to digital media could hurt market share Sales Tax Overhang – imposition of sales tax across the U.S. Omnipresent Competitive Risk – from Offline retailers, Online competitors, new business models Price Target: Our $330 price target is based on a blended average of a 33x Price/FCF Multiple, and a 1.8x Price/Sales multiple on our 2014 estimates.Mark S. Mahaney (Analyst) (415) 633-8608 32André Séquin (Analyst) (212) 618-7688
  33. 33. Required DisclosuresConflicts DisclosuresThis product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to providespecific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to or send a request to RBC CM Research Publishing,P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investmentbanking activities of the member companies of RBC Capital Markets and its affiliates.Distribution of RatingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firms own rating categories. Although RBC Capital Markets ratings of Top Pick/Outperform, SectorPerform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because ourratings are determined on a relative basis (as described above). Distribution of Ratings RBC Capital Markets, Equity Research Investment Banking Serv./Past 12 Mos.Rating Count Percent Count PercentBUY[TP/O] 791 50.64 281 35.52HOLD[SP] 701 44.88 180 25.68SELL[U] 70 4.48 8 11.43Mark S. Mahaney (Analyst) (415) 633-8608 33André Séquin (Analyst) (212) 618-7688
  34. 34. Required DisclosuresConflicts PolicyRBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To accessour current policy, clients should refer to or send a request to RBC CM Research Publishing,P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend orsupplement this policy at any time.Dissemination of Research and Short-Term Trade IdeasRBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to localtime zones in overseas jurisdictions. RBC Capital Markets research is posted to our proprietary websites to ensure eligible clients receivecoverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the salespersonnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contact your investmentadvisor or institutional salesperson for more information regarding RBC Capital Markets research. RBC Capital Markets also provideseligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color and commentary, and may alsocontain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or other research reports. SPARC may beaccessed via the following hyperlink: A Short-Term Trade Idea reflects the research analysts directional viewregarding the price of the security of a subject company in the coming days or weeks, based on market and trading events. A Short-TermTrade Idea may differ from the price targets and/or recommendations in our published research reports reflecting the research analystsviews of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or otherfactors. Thus, it is possible that the security of a subject company that is considered a long-term Sector Perform or even an Underperformmight be a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, the security of a subjectcompany that is rated a long-term Outperform could be considered susceptible to a short-term downward price correction. Short-Term TradeIdeas are not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes anyobligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investorsand have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisionsregarding any Short-Term Trade Ideas discussed therein.Analyst CertificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subjectsecurities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the responsible analyst(s) in this report.The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for useby RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard orclassification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose withrespect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICSclassifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.Mark S. Mahaney (Analyst) (415) 633-8608 34André Séquin (Analyst) (212) 618-7688
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Hong Kong persons wishing to obtainfurther information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets(Hong Kong) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queens Road Central, Hong Kong (telephone number is 2848-1388).To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities grantedoffshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and does not take into account the objectives,financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, youshould consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the RoyalBank of Canada, Singapore Branch or Royal Bank of Canada (Asia) Limited.To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financialinstruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank. ® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets, LLC 2013 - Member SIPC Copyright © RBC Dominion Securities Inc. 2013 - Member CIPF Copyright © RBC Europe Limited 2013 Copyright © Royal Bank of Canada 2013 All rights reservedMark S. Mahaney (Analyst) (415) 633-8608 35André Séquin (Analyst) (212) 618-7688