The Top Ten Internet Trends in 2013

EQUITY I RESEARCH

Ad Age Digital Conference 2013
The Top Ten Internet Trends in 2013

RBC Capital Markets, LLC
Mark S. Mahaney (Analyst) (415) 633-8608 mark.mahaney@rbccm.com
André Séquin (Analyst) (212) 618-7688 andre.sequin@rbccm.com
Brian Peak (Associate) (212) 548-3183 brian.peak@rbccm.com
Kevin Potterton (Associate) (212) 428-6489 kevin.potterton@rbccm.com

April 16, 2013
This 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.

Agenda

I. Internet Sector Coverage & Comps

II. GOOG and FB Drill Down

III. 2013 U.S. Internet Sector Outlook

IV. Top 10 Internet Trends in 2013

V. RBC’s Top 3 Internet Stock Picks…GOOG, PCLN, AMZN

Mark S. Mahaney (Analyst) (415) 633-8608 mark.mahaney@rbccm.com 2

Internet Sector Coverage & Comps

Internet Sector Coverage
Company Name Ticker Price Rating Target Price
Active Network ACTV $4.16 OP $8
Amazon AMZN $261.14 OP $330
Angie's 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
Web.com 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 Risk


Sector Coverage Comps Table

Comparable Valuation Analysis
(in millions, except per share amounts)

Shares Market Adjusted P/E EV/EBITDA FCF/EV Yield
Company Ticker Price Outstanding Cap (USD) EV (USD) FY13E FY13E FY13E

Active Network, Inc. ACTV $4.16 60.42 251.36 192.87 N/M 3.8x 8.4%
Amazon.com, Inc. AMZN $261.14 461.00 120,385.54 112,021.54 89.5x 20.0x 3.9%
Angie's List Inc. ANGI $19.34 57.89 1,119.57 1,091.80 N/M N/M N/M
AOL 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 1.4%
priceline.com 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 9.7%
Web.com 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 estimates


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 Q4:12A

Source: RBCCM Estimates, Company Reports

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 & Canada

Source: RBCCM Estimates, Company Reports

2013 U.S. Internet Sector Outlook

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, Video


U.S. Online Retail – 15%+ Growth in ’13…Upside Due to Mobile & SDD*

($ in B) 2009 2010 2011 2012A 2013E 2014E
Total U.S. Retail* $1,743 $1,803 $1,916 $2,011 $2,091 $2,186
Y/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 $292
Y/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%
*Excludes Auto, Gas, Food, and Health & Personal Care

Source: RBCCM Estimates, Department of Commerce *Same Day Delivery


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%

Source: RBCCM Estimates, PhocusWright


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 Commerce


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 Reports


The Top 10 Internet Trends In 2013

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


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, TRIP


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, EBAY


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


Stock Plays: EBAY


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, TRIP


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, YHOO


5. Online Video Rampup…And The Migration Of TV Ad Budgets…
Time Spent Watching Video Online/Mobile (Monthly)
13:6

12:24
Hours: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 GOOG


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


Stock Plays: AMZN, With Negative Implications For EBAY


7. Local Internet Adoption…The Final Frontier

Annual Growth In Local Presence

100%

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


Stock Plays: AOL, GOOG, GRPN, TRIP


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…


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 EBAY


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 About.com 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, YHOO


Stock Plays Summary…The Beneficiaries Are…AMZN, EBAY, GOOG

AMZN AOL EBAY EXPE FB GOOG GRPN IACI PCLN TRIP YHOO
International Recovery

Mobile Materiality

Tablet Traction

Facebook Ubiquity

Online Video Rampup

Same Day Delivery Surge

Local Internet Adoption

Cloud Computing Critical Mass

Alternative Payments Rollout

Cash Pileup

Biggest Beneficiaries

Source: RBCCM Estimates


RBC’s Top 3 Large/Mid Cap Internet Stock Picks

Google (GOOG) OP, $950 Price Target

The GOOG Long Thesis:
1. Still Significant Secular Growth for Online Advertising – 20%ish global growth thanks to SoLoMoVo
2. Very Strong Market Share in Core Search – 70%+ of global Search ad revenue
3. Strong Market Share in Other Ad Segments – Display with YouTube & GDN, Mobile
4. Significant Competitive Moats – $17B in capex and $13B in R&D over past 5 years
5. One of the Best Management Teams on the Internet – excellent record of innovation & acquisition
6. Reasonable Valuation – trades in line with growth rate

GOOG 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 estimates

Priceline (PCLN) OP, $900 Price Target

The PCLN Long Thesis:
1. Still Significant Secular Growth for Online Travel – double-digit global bookings growth market
2. Still Significant Hotel Market Share Potential – PCLN accounts for approx 5% of global hotel sales
3. Sustainable Competitive Advantages in Europe – largest base of hotel partners and lowest commission rates
4. Significant Growth opportunity in Asia and LatAm – via Agoda & Booking.com properties
5. One of the Best Management Teams on the Internet
6. High Growth and High Quality EPS – high conversion into FCF
7. 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 estimates

Amazon (AMZN) OP, $330 Price Target

The 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 Thesis
3. 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, scale
5. One of the Best Management Teams on the Internet
6. High Growth and High Quality EPS – high conversion into FCF

AMZN 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.

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regarding any Short-Term Trade Ideas discussed therein.

Analyst Certification
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specific 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 use
by 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 or
classification (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 with
respect 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 GICS
classifications 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.


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been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its
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