Tài liệu Nothing But Net 2009 Internet Investment Guide 20 doc

191 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Expedia, Overweight, ($7.80) We expect Expedia’s Y/Y revenue to fall in 2009 as the company faces decreased travel volume, falling ADRs, difficult FX ratios, and reduced airline capacity. However, we do think some of the negative economic effects will be slightly offset by strength in non-transaction revenue streams, improved conversion rates, and careful cost control measures. Expedia trades at 3.6x our F’09 EBITDA estimate of $756M, hence our Overweight rating. We are introducing a $12 December 2009 price target. • We think 2009 gross bookings will decline 3% on a Y/Y basis. We expect domestic gross bookings to decline 3% due to airline capacity cuts, weak ADRs, and lower volumes. We think European gross bookings will decline 10%, as we see European travel weakness mimicking that of the US and expect FX effects to contribute an additional 13 points of declines. • Non-transaction revenue could slightly offset bookings weakness. Although we expect the growth rate to decelerate, we think insurance waivers, co-branded credit cards, and expanded ad revenue streams on transaction sites will supply some lift to the 2009 revenue growth rate. • Expense cuts should aid bottom-line performance. Management has expressed its intention to manage sales and marketing spend around revenue performance. Additionally, we think there is slight room for cost reductions in call centers, credit card processing fees, and air fulfillment expenses. • 2009 drivers. In our view, the following factors will drive EXPE shares in 2009: (1) advertising and other non-transaction performance, (2) cost savings returns on prior investments, and (3) ADR and air capacity trends. • Maintaining 4Q’08 estimates. We are looking for revenue, EBITDA, and pro forma EPS of $648M, $166M, and $0.27. Our current and newly introduced 2010 estimates are in the table below: Table 111: Expedia Financial Snapshot $ in millions, except per share data EXPE 4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y J.P. Morgan Revenue 648.1 2,964.2 2,919.1 3,287.6 11.2% -1.5% 12.6% EBITDA 165.8 781.3 755.9 883.0 7.2% -3.3% 16.8% Pro Forma EPS 0.27 1.30 1.26 1.40 5.8% -2.6% 11.0% Consensus Revenue 679.3 2,971.7 2,869.8 3,063.8 11.5% -3.4% 6.8% EBITDA 169.0 757.1 713.8 745.0 3.9% -5.7% 4.4% Pro Forma EPS 0.25 1.30 1.23 1.39 6.0% -5.4% 13.0% Source: J.P. Morgan estimates, Company data, and Bloomberg 192 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Our Estimates and Outlook for 2009 We are modeling F’09 revenue of $2.92B, EBITDA of $756M, and pro forma EPS of $1.26, representing Y/Y declines of 2%, 3%, and 3%, respectively. We expect most of the revenue decline to be driven by the international market, where travel weakness and foreign currency exchange rate downside is expected to lead to a gross bookings decline of 10% Y/Y. We think US gross bookings will be weak due to expected ADR declines and air capacity decreases, however we think the non- transactional revenue will slightly offset this. Therefore, we are looking for a North America gross bookings decline of 3% Y/Y but a total revenue decline of only 2% Y/Y. We expect the OIBA margin decline to moderate to only 70 bps Y/Y, as we think management will work to manage sales and marketing spend around revenue performance. Table 112: Key Booking and Revenue Y/Y Growth Trends 4Q'07 1Q'08 2Q'08 3Q'08 Advertising and Media Revenue 88.9% 73.0% 68.2% 53.7% Number of Transactions 19.3% 15.6% 10.2% 5.9% Merchant hotel room nights 18.6% 22.9% 13.6% 15.0% ADR 7.0% 3.0% 1.0% -1.0% Air Tickets Sold 15.0% 11.0% 4.0% -5.0% Airfare 9.0% 8.0% 12.0% 11.0% Source: Company reports and J.P. Morgan estimates. Our Estimates and Outlook for 2010 We are introducing F’10 revenue, EBITDA, and EPS estimates of $3.29B, $883M, and $1.40, which represent Y/Y growth of 13%, 17%, and 11%, respectively. We expect much of the revenue growth to stem from European gross booking increases, which we modeled growing 23% Y/Y due to an expected easing of economic headwinds and flat foreign currency exchange rates. Domestically, we expect gross bookings growth to rebound to 10% Y/Y from down 3% in 2009 due to an easing in economic conditions and the comping of air capacity cuts. We expect OIBA margins to decline an additional 70 bps as selling and marketing expenses rise. We Are Introducing a Price Target of $12 In introducing price targets for our coverage, we have derived multiples based on 5- year forward EBIT CAGRs. We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn. As such, given our projection for Expedia of a ~7% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock can achieve a 7x EV/EBIT multiple to our F’09 EBIT estimate (reflecting better forward visibility than the current valuation of 5x our F’09 estimate) and thus arrive at our December 2009 price target of $12. The parameters of our EV/EBIT multiple analysis are in the table below: 193 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 113: Growth Outlook $ in millions 2009E 2010E 2011E 2012E 2013E 2014E Revenues 2,919.1 3,287.6 3,616.3 3,905.6 4,140.0 4,347.0 Y/Y change 12.6% 10% 8% 6% 5% Less: Operating Expenses 2,372.2 2,692.9 2,969.0 3,210.4 3,403.1 3,573.2 As % of total revenues 81.3% 81.9% 82.1% 82.2% 82.2% 82.2% Operating Income (Loss) 546.9 594.7 647.3 695.2 736.9 773.8 Operating margin 18.7% 18.1% 17.9% 17.8% 17.8% 17.8% Source: Company reports and J.P. Morgan estimates. Table 114: EV/EBIT Multiple Analysis $ in millions 5 yr forward EBIT CAGR 7% 1x EBIT Growth 7 2009 EBIT 546.9 Implied Enterprise Value 3,828.6 + Cash 666.7 - Debt 894.4 Market Value 3,600.9 Share count 291.7 2009 Price Target $12 Source: Company reports and J.P. Morgan estimates. Valuation and Rating Analysis We believe Expedia is undervalued given the potential for international growth and increased advertising revenue opportunities. On an EV/EBITDA basis, Expedia trades at 3.6x our F’09 EBITDA estimate of $756 million, versus its peers at 6.5x. As such, we rate the stock Overweight. Risks to Our Rating The company’s shares could underperform if the company is unable to (1) withstand the competitive threat that the travel suppliers and travel search engines pose, (2) achieve a high ROI on selling and marketing investments, (3) achieve strong gross bookings growth in a weak economy, and (4) achieve further expansion into international markets. 194 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 115: EXPE Annual Income Statement $ in millions INCOME STATEMENT 2007 2008E 2009E 2010E North America 13,937 14,663 14,254 15,660 Europe 3,872 4,665 4,218 5,183 Other 1,822 2,300 2,576 2,834 Total Gross Bookings 19,631 21,627 21,048 23,677 % North America 71% 68% 68% 66% % Europe 20% 22% 20% 22% % Other 9% 11% 12% 12% Y/Y Growth North America 9.4% 5.2% -2.8% 9.9% Europe 42.2% 20.5% -9.6% 22.9% growth ex-FX Other 27.9% 26.2% 12.0% 10.0% Total GB 16.3% 10.2% -2.7% 12.5% Total Revenue 2,665.3 2,964.2 2,919.1 3,287.6 Revenue as a % GB 13.6% 13.7% 13.9% 13.9% Cost of Revenues 559.5 641.9 638.4 735.0 Gross Profit 2,105.8 2,322.4 2,280.7 2,552.5 Gross Margin 79.0% 78.3% 78.1% 77.6% Selling and Marketing expense 980.1 1,109.7 1,098.7 1,245.2 General and Administrative expense 289.4 312.0 312.6 352.1 Technology and Content 166.9 192.2 191.4 215.5 Amortization of intangibles 77.6 68.4 60.0 60.0 Stock Based Compensation 62.8 67.0 71.0 85.0 Total Operating Expenses 1,576.8 1,749.3 1,733.7 1,957.8 Total Operating Expenses (Pro forma) 1,436.3 1,613.9 1,602.7 1,812.8 Operating Profit 529.0 573.0 546.9 594.7 Operating Profit (Pro forma) 669.5 708.4 677.9 739.7 Operating Margin 19.8% 19.3% 18.7% 18.1% Operating Margin (Pro forma) 25.1% 23.9% 23.2% 22.5% EBITDA 729.0 781.3 755.9 883.0 OIBA 669.5 708.4 677.9 739.7 OIBA Margin 25.1% 23.9% 23.2% 22.5% Net Interest Income (13.5) (35.5) (44.0) (36.0) Other (18.6) (37.0) - - Equity Income of Unconsolidated Affiliates - - - - EBT (Earnings Before Taxes) 497.0 500.5 502.9 558.7 EBT (Earnings Before Taxes - Pro forma) 656.0 652.7 633.9 703.7 Minority Interest Income 2.0 3.2 2.0 2.0 Income Tax Expense (203.1) (202.9) (196.1) (217.9) Tax Rate 41% 40% 39% 39% Net Income (Reported) 295.8 300.8 308.8 342.8 Net Income (Pro Forma) 391.0 392.2 386.7 429.3 EPS (Reported) 0.94 1.03 1.06 1.18 EPS (Pro Forma) 1.23 1.30 1.26 1.40 Sharecount 314.3 292.9 291.7 291.7 Source: Company reports and J.P. Morgan estimates. 195 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 116: EXPE Quarterly Income Statement $ in millions 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E North America 3,559 3,723 3,519 3,136 4,087 4,099 3,561 2,916 3,883 3,894 3,561 2,916 Europe 940 939 1,074 919 1,257 1,223 1,272 913 1,119 1,040 1,119 940 Other 425 466 465 466 559 611 580 550 637 684 650 605 Total Gross Bookings 4,924 5,128 5,058 4,521 5,902 5,933 5,413 4,379 5,639 5,618 5,330 4,461 Total Revenue 550.5 689.9 759.6 665.3 687.8 795.0 833.3 648.1 659.7 764.0 826.1 669.2 Revenue as a % GB 11.2% 13.5% 15.0% 14.7% 11.7% 13.4% 15.4% 14.8% 11.7% 13.6% 15.5% 15.0% Cost of Revenues 120.4 143.0 150.5 145.6 151.3 168.3 176.5 145.8 146.5 169.6 175.1 147.2 Gross Profit 430.1 546.9 609.1 519.7 536.5 626.7 656.8 502.3 513.3 594.4 651.0 522.0 Gross Margin 78.1% 79.3% 80.2% 78.1% 78.0% 78.8% 78.8% 77.5% 77.8% 77.8% 78.8% 78.0% Selling and Marketing expense 219.0 253.1 276.6 231.3 283.4 296.7 296.3 233.3 262.6 286.5 307.3 242.2 General and Administrative expense 68.5 68.7 75.7 76.5 79.5 76.7 81.4 74.5 78.5 74.9 81.0 78.3 Technology and Content 38.2 38.0 44.0 46.7 47.9 49.3 48.4 46.7 46.2 47.4 53.7 44.2 Amortization of intangibles 21.2 19.5 18.6 18.3 18.1 18.7 15.8 15.8 15.0 15.0 15.0 15.0 Stock Based Compensation 15.9 14.0 14.4 18.6 17.8 14.9 15.4 19.0 18.0 16.0 17.0 20.0 Total Operating Expenses 362.8 393.3 429.3 391.4 446.6 456.2 457.3 389.3 420.3 439.8 474.0 399.7 Total Operating Expenses (Pro forma) 325.7 359.8 396.3 354.5 410.7 422.7 426.1 354.5 387.3 408.8 442.0 364.7 Operating Profit 67.3 153.6 179.8 128.3 90.0 170.5 199.6 112.9 93.0 154.7 177.0 122.3 Operating Profit (Pro forma) 104.4 187.1 212.8 165.2 125.9 204.0 230.8 147.8 126.0 185.7 209.0 157.3 Operating Margin 12.2% 22.3% 23.7% 19.3% 13.1% 21.4% 24.0% 17.4% 14.1% 20.2% 21.4% 18.3% Operating Margin (Pro forma) 19.0% 27.1% 28.0% 24.8% 18.3% 25.7% 27.7% 22.8% 19.1% 24.3% 25.3% 23.5% EBITDA 118.8 200.7 228.1 181.3 142.9 222.3 250.4 165.8 145.0 204.7 229.0 177.3 OIBA 104.4 187.1 212.8 165.2 125.9 204.0 230.8 147.8 126.0 185.7 209.0 157.3 OIBA Margin 19.0% 27.1% 28.0% 24.8% 18.3% 25.7% 27.7% 22.8% 19.1% 24.3% 25.3% 23.5% Net Interest Income (3.9) 0.7 (1.1) (9.2) (7.6) (4.3) (12.6) (11.0) (11.0) (11.0) (11.0) (11.0) Other (5.5) 5.9 (13.9) (5.2) (3.7) (5.1) (23.2) (5.0) Equity Income of Unconsolidated Affiliates EBT (Earnings Before Taxes) 57.9 160.2 164.8 114.0 78.7 161.1 163.7 96.9 82.0 143.7 166.0 111.3 EBT (Earnings Before Taxes - Pro forma) 100.5 187.7 211.8 156.0 118.3 199.7 197.9 136.8 115.0 174.7 198.0 146.3 Minority Interest Income 0.5 0.0 0.3 1.2 1.5 0.9 0.3 0.5 0.5 0.5 0.5 0.5 Income Tax Expense (23.6) (64.1) (65.5) (49.9) (29.0) (65.9) (69.2) (38.8) (32.0) (56.0) (64.7) (43.4) Tax Rate 41% 40% 40% 44% 37% 41% 42% 40% 39% 39% 39% 39% Net Income (Reported) 34.8 96.1 99.6 65.4 51.3 96.0 94.8 58.7 50.5 88.1 101.8 68.4 Net Income (Pro Forma) 59.3 114.0 123.1 94.6 71.0 120.8 118.3 82.1 70.2 106.5 120.8 89.2 EPS (Reported) 0.11 0.30 0.32 0.22 0.17 0.33 0.33 0.20 0.17 0.30 0.35 0.23 EPS (Pro Forma) 0.18 0.35 0.39 0.31 0.24 0.40 0.39 0.27 0.23 0.35 0.39 0.29 Sharecount 323.7 320.2 312.8 300.5 294.0 294.0 291.7 291.7 291.7 291.7 291.7 291.7 Source: Company reports and J.P. Morgan estimates. 196 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 117: EXPE Annual Balance Sheet $ in millions 2007 2008E 2009E 2010E ASSETS Cash and Cash Equivalents 617.4 378.0 712.3 1,089.9 Restricted Cash and Cash Equivalents 16.7 7.1 23.0 23.0 Marketable Securities - - - - Accounts and Notes Receivable 268.0 291.3 291.3 291.3 Receivables from IAC and Subsidiaries - - - - Deferred Income Taxes - - - - Other Current Assets 143.6 257.8 257.8 257.8 Total Current Assets 1,045.6 934.1 1,284.3 1,661.9 Goodwill 6,006.3 6,303.9 6,303.9 6,303.9 Intangible Assets, Net 970.8 1,075.4 1,075.4 1,075.4 Long-Term Investments and Other 93.2 82.0 82.0 82.0 Property, Plant and Equipment, Net 179.5 264.2 361.1 469.5 Total Assets 8,295.4 8,659.6 9,106.7 9,592.6 LIABILITIES Accounts Payable, Trade 852.3 746.8 746.8 746.8 Deferred Merchant Bookings 609.1 644.3 644.3 644.3 Deferred Revenue 12.0 14.7 14.7 14.7 Income Tax Payable - - - - Deferred income taxes - - - - Short term borrowings - - - - Other Current Liabilities 301.0 224.1 224.1 224.1 Total Current Liabilities 1,774.4 1,629.9 1,629.9 1,629.9 Long Term Debt 500.0 894.4 894.4 894.4 Credit Facility 585.0 250.0 250.0 250.0 Other Long-Term Liabilities 204.9 236.9 236.9 236.9 Deferred Income Taxes 351.2 389.6 389.6 389.6 Derivative liabilities - - - - Minority Interest 61.9 57.9 57.9 57.9 Total Liabilities 3,477.3 3,458.6 3,458.6 3,458.6 INVESTED EQUITY Invested Capital - - - - Accumulated Other Comprehensive Income - - - - Total Invested Equity 4,818.1 5,200.9 5,648.0 6,134.0 LIABILITIES AND INVESTED EQUITY 8,295.4 8,659.6 9,106.7 9,592.6 Source: Company reports and J.P. Morgan estimates. 197 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 118: EXPE Annual Cash Flow Statement $ in millions 2007 2008E 2009E 2010E CASH FLOW FROM OPERATIONS Net Income 295.8 300.9 308.8 342.8 Adjustments to Reconcile Cash to Income - - - - Depreciation and Amortization 59.5 72.9 78.0 84.0 Amortization of non-cash distributing & mktg - - - - Amortization of non-cash compensation expense - - - - Amortization of intangibles & stock-based comp 140.4 135.4 131.0 145.0 Deferred Income Taxes (1.6) (10.0) (1.9) (1.9) Unralized gain on derivative instrument 5.7 (4.6) - - Equity in Losses of Unconsolidated Affiliates 2.6 (0.8) (5.4) - Minority Interest in Income of Subsidiaries (2.0) (3.1) (1.3) - Other 3.8 22.1 - - Impairment of Intangible Asset - - - - Foreign exchange gain/loss (12.5) 56.0 - - Changes in Current Assets and Current Liabilities - - - - Accounts and Notes Receivable (44.4) 14.3 - - Prepaids and Other Assets (32.4) (44.8) - - Accounts Payable and Accrued Liabilities 51.7 15.2 - - Accounts Payable, merchants 101.1 (65.6) - - Deferred Revenue 1.6 2.6 - - Deferred Merchant Bookings 142.6 35.3 - - Other, Net - - - - Net Cash Provided by Operating Activities 712.0 525.9 509.2 570.0 Free Cash Flow (FCF) 625.4 366.9 334.3 377.6 CASH FLOW FROM INVESTING Acquisitions, Net of Cash Required (59.6) (529.4) - - Capital Expenditures (86.7) (159.0) (174.9) (192.4) Purchase of Marketable Securities - - - - Proceeds from Sale of Marketable Securities - - - - Increase in Long-Term Investments & Notes Rec. (33.2) 8.3 - - Proceeds from Sale of Business - 1.6 - - Other, Net - (100.6) - - Net Cash Provided by Investing Activities (179.5) (779.1) (174.9) (192.4) CASH FLOW FROM FINANCING Transfers to IAC - - - - Short term borrowings 585.0 (335.0) - - Proceeds from issuance of long term debt - 392.4 - - Proceeds from Sale of Subsidiary Stock, inc. Options 29.5 9.5 - - Changes in Restricted Cash (6.5) 8.0 - - Principal payments on long term obligations - - - - Treasury stock activity (1,397.2) (12.6) - - Other, Net (0.8) - - - Net Cash Provided by Investing Activities (790.0) 62.4 - - Effect of FX on Cash & Equivalents 21.5 (48.5) - - Net Increase in Cash & Equivalents (235.9) (239.4) 334.3 377.6 Cash & Equivalents at Beginning of Period 853.3 617.4 378.0 712.3 Cash & Equivalents at End of Period 617.4 378.0 712.3 1,089.9 Source: Company reports and J.P. Morgan estimates. 198 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Google, Overweight, ($303.11) Although we think Google’s growth will be afflicted in the near term by the current recession, we believe the company is strengthening its long-term strategic position through market share gains, increased search spend penetration of total advertising budgets, and greater cost efficiency. At 14.3x our F’09 GAAP EPS estimate of $18.36, we find Google’s valuation attractive and are introducing a $430 December 2009 price target. As such, we maintain our Overweight rating. • Market share gains are likely to continue. We think advertisers will simplify their ad spend and move toward better performing platforms. As such, we expect Google to continue to take market share from search competitors. Additionally, we see Google likely to increase coverage to meet advertiser demand. We think coverage will increase 110 bps in 2009 and O&O revenue will increase 13% Y/Y. • Google will likely benefit from increased search spend penetration. According to Nielsen research, even though people spend 29% of their time on the Internet, this medium only has an 8% market share of total advertiser spend. Thus, we think advertisers will shift ad spend toward search to better align audience usage and to use the performance-based advertising platform. • Google is striving to achieve a more efficient cost structure. In the first 3 quarters of 2008, we estimate that Google grew its operating expenses 40% Y/Y, roughly in-line with net revenue growth of 41%. In 2009, we think Google will be controlling its costs much more carefully, specifically in the areas of contract employees and non-core product development. • 2009 drivers. In our view, the following factors will drive GOOG shares in 2009: (1) improved cost efficiencies, (2) search outperformance relative to other advertising media, and (3) increased monetization and coverage enhancements. • Lowering our 4Q’08 estimates. Due to the greater-than-expected economic deterioration, we are lowering our 4Q estimates. We are now looking for 4Q revenue, EBITDA, and pro forma EPS of $4.05B, $2.33B, and $4.83 vs. our prior estimates of $4.39B, $2.49B, and $5.22, respectively. Although we think there may be upside to our estimates, we are being most conservative in our 4Q outlook. We are looking for 1% sequential growth in O&O properties but think network properties may underperform and are modeling (20)% Q/Q growth. Our current and newly introduced 2010 estimates are in the table below: Table 119: Google Financial Snapshot $ in millions, except per share data GOOG 4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y J.P. Morgan Revenue 4,049.2 15,688.9 17,596.5 21,762.2 34.6% 12.2% 23.7% EBITDA 2,327.6 9,142.4 10,209.7 12,277.8 32.1% 11.7% 20.3% Pro Forma EPS 4.83 19.23 21.16 25.26 23.3% 10.1% 19.3% Consensus Revenue 4,237.9 15,888.8 19,000.0 22,218.2 36.3% 19.6% 16.9% EBITDA 2,490.1 9,276.0 10,953.0 12,781.4 34.0% 18.1% 16.7% Pro Forma EPS 5.05 19.44 21.88 22.35 24.7% 12.6% 2.1% Source: J.P. Morgan estimates, Company data, and Bloomberg 199 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Our Estimates and Outlook for 2009 We are lowering our 2009 net revenue, EBITDA, and pro forma EPS estimates to $17.602B, $10.21B, and $21.16 from our prior estimates of $19.52B, $11.12B, and $23.36, respectively. Our new estimates call for Y/Y revenue, EBITDA, and EPS growth of 12%, 12%, and 10%, respectively. In 2009, we are expecting Google to continue to make progress on the international front, both through search volume growth and increasing advertiser demand. However, we expect this to be offset by weaker advertiser spend due to the economy and unfavorable foreign currency exchange rates. We are modeling international gross revenue growth of 5% Y/Y to $11.1B in 2009. Because of the foreign currency exchange rate headwinds, this is the first year that we expect international revenues to decline to 50.9% of total revenue from 51.2% in 2008. Beyond international, we believe Google will generate above-average market share growth through continued volume share gains from its domestic competitors. We continue to believe Google has the strongest brand in search. Google’s rapid innovation of new web offerings should lead to increased attention from consumers, which should contribute to sustained volume share growth in 2009. We think paid clicks will grow 10% Y/Y as search volume increases and as Google continues to take market share. Although we think Google's attempts to diversify revenue are going to be successful in the long term, we think advertisers will shy away from more experimental advertising forms in the current economic environment. Hence, we do not expect a meaningful return on video and mobile investments in the near term. Our Estimates and Outlook for 2010 We are introducing 2010 estimates, which call for Y/Y revenue, EBITDA, and pro forma EPS growth of 24%, 20%, and 19%, respectively. Specifically, our F’10 revenue, EBITDA, and pro forma EPS estimates are $21.8B, $12.3B, and $25.26, respectively. In 2010, we are expecting the economic recession to subside and foreign currency exchange rates to be flat. Thus, we are expecting search revenue growth to accelerate. We are modeling Google.com search volumes to grow ~21% in 2010. We believe international search revenues will make up 53% of total company revenues in 2010. We Are Introducing a Price Target of $430 In introducing price targets for our coverage, we have derived multiples based on 5- year forward EBIT CAGRs. We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn. As such, given our projection for Google of a ~17% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock can achieve a 17x EV/EBIT multiple to our F’09 EBIT estimate (reflecting 200 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com better forward visibility than the current valuation of 12x our F’09 estimate) and thus arrive at our December 2009 price target of $430. The parameters of our EV/EBIT multiple analysis are in the table below: Table 120: Growth Outlook $ in millions 2009E 2010E 2011E 2012E 2013E 2014E Revenues 17,596.5 21,762.2 25,461.8 29,281.1 33,380.4 37,719.9 Y/Y change 23.7% 17% 15% 14% 13% Less: Operating Expenses 10,311.8 12,844.4 14,971.5 17,129.4 19,360.7 21,877.5 As % of total revenues 58.6% 59.0% 58.8% 58.5% 58.0% 58.0% Operating Income (Loss) 7,284.7 8,917.8 10,490.3 12,151.7 14,019.8 15,842.4 Operating margin 41.4% 41.0% 41.2% 41.5% 42.0% 42.0% Source: Company reports and J.P. Morgan estimates. Table 121: EV/EBIT Multiple Analysis $ in millions 5 yr forward EBIT CAGR 17% 1x EBIT Growth 17 2009 EBIT 7,284.7 Implied Enterprise Value 123,839.5 + Cash 12,531.7 - Debt - Market Value 136,371.1 Share count 317.8 2009 Price Target 429.14 Source: Company reports and J.P. Morgan estimates. Valuation and Rating Analysis We believe GOOG shares are fundamentally attractive due to secular industry growth trends, improving fundamentals in the international market, and expansion of new product categories such as contextual ad and local search. Google remains an Overweight pick. Google trades at 14x its F’09 EPS vs. its large-cap Internet peers at 26x. Given Google’s higher growth rate, we think it deserves a premium. Hence, our OW rating. Risks to Our Rating Google has experienced very fast revenue growth over the past few years. Our Overweight rating is based on the assumption that Google will continue to be the market leader in the paid search space and will continue to enjoy strong revenue growth. If the content publishers like Yahoo! and Microsoft are able to gain market share through user defection from Google’s user base, then our rating could be too optimistic. However, we have not seen any trends that would support this argument thus far. Our Overweight rating is also predicated on the company’s success in the international market. If the company cannot successfully build out a larger international advertising base, the company will not be able to increase its monetization rate abroad. Additionally, as Google continues to expand its business internationally, it may face regulatory hurdles that make the business climate less hospitable and potentially less profitable than the markets where it currently operates. . imran.t.khan@jpmorgan.com Table 113: Growth Outlook $ in millions 200 9E 201 0E 201 1E 201 2E 201 3E 201 4E Revenues 2,919.1 3,287.6 3,616.3 3,905.6 4,140.0 4,347.0. Januar y 200 9 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 117: EXPE Annual Balance Sheet $ in millions 200 7 200 8E 200 9E 201 0E ASSETS