GOOG Collins1

8/14/2019 GOOG Collins1

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Google Inc.

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US | Internet & Software | GOOG January 13, 2010

Is Your Personal Information Safe?

Recommendation BUY

Price $590.4Target $635.0

Fiscal Year Ends: Dec 2008A 2009E 2010E

Revenue (MM) $15,857 $17,384 $20,322PF Earnings per Share

Q1 $4.84 $5.16A $6.17Q2 $4.63 $5.36A $6.10Q3 $4.92 $5.89A $6.40Q4 $5.10 $6.26 $7.21

Year $19.49 $22.68 $25.89P/E ProForma 30.3x 26.0x 22.8xDiluted Shares (MM) 317.5 319.1 324.2

Key Data

52-Week Range $629.51-$282.7Shares Outstanding (MM) 243Market Cap (MM) $143,48

Avg. Daily Volume (000) 2Float (MM) 241% Held Institutionally 85.5Long Term Growth Rate 18Total Debt (MM) $0Cash Per Share $68.7

s

SummaryYesterday Google announced its decision to stop censoring its searchresults in China (even though that means closing its China operations) inan apparent move to retaliate following a sophisticated cyber attack onuser personal information hosted in Google's servers in China. Google'sreaction shows that as a leading Internet company, it cannot afford itsreputation to be tarnished by allowing anyone to tamper with userspersonal information or privacy data. The cyber attack in China is not alocal issue but can risk Google global franchise & biz model, which is builton trust (that it takes utmost care in protecting users privacy). Per ourestimates, China accounts for approx. $230mm in rev, $90mm in EBITDA,and $0.19 in PF EPS for '09 growing 3x of US and will likely reach$300mm, $120mm, and $0.24, respectively, in '10. It is too early toconclude if Google will exit China in our view.

s Recent developments in ChinaIn an extensive blog posted by David Drummond, Google's Chief LegalOfficer and SVP Corporate Development, the company announced onTuesday its plans to stop censoring search results in China and somefacts about the sophisticated targeted hacker attack on its servers.Ongoing investigation has determined that the main objective of the attackwas to obtain personal information of civil rights activists from China andaround the world. According to the company, other major US companieshave been victims of the same attack.

s Google ChinaWith 360mm Internet users, China offers the largest Internet audience inthe world and presents the largest growth opportunity for GOOG or anyother Internet company. Since 2006, Google has made lots ofinvestments in the country such as opening an R&D center, hosting

servers,censoring search results, and hiring Dr. Kai-Fu Lee, in a movedisputed in court by Microsoft, to lead its Chinese operations (Mr. Lee leftGoogle in Sep. '09). Despite all these effor ts and investments, Google hasbeen the distant #2 player on the Chinese search market and strugglingagainst Baidu (with market share of 31% vs. 64% by BIDU ).

Stock Performance

Q1 Q1 Q2 Q3200

300

400

500

600

700

2010

1 Year Price History for GOOG

Created by BlueMatrix

0

3

6

9

1

1m 3m 12m

Performance 0.0% 12.7% 88.8%

Source: Bloomberg

Google is a leading provider of Internet search and onlinadvertising, provider of Web applications/tools, as well asdeveloper of software and mobile applications. Thcompany operates a leading index of web sites and medcontent and offers an auction-based advertising platforwhere advertisers can deliver targeted messaging Google search pages and relevant third-party web siteThe company was founded in 1998, and is headquarterein Mountain View, California.

Please see page 2 for price targetsvaluation methods, and risks tachieving those targets.

Disclaimers regarding the content of this report as well as full disclosure ofCollins Stewart LLC's ratings and information on the firm's position(s) insecurities mentioned herein appear on pages 11 - 13 of this report.


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Valuation & RisksValuation

GOOG: We arrive at our $635 PT by using a combination of EV/EBITDA an

P/E multiples on our 10 estimates. We assign a multiple of 14.5x to our 10EBITDA of $12.74bn (EBITDA per share of $39.30) to reach $645, adjustinfor 2009 year-end net cash of $24.04bn or $75.36 per share. This implieEV/EBITDA to Growth of 0.8x based on our LT EBITDA growth rate of 19%We assign a multiple of 23x to our 2010E PF EPS of $25.89 to reach a $59price. This implies a PEG of 1.4x based on our LT PF EPS growth rate o17%. We are using modestly higher multiples to reflect our higher confidencin online ad spend recovery and cost control initiatives at Google.

MSFT: We arrive at our $36 PT by using P/E and P/FCF multiples on ouCY10 estimates. We assign a P/E multiple of 17x to our CY2010 GAAP EPof $2.02 to reach $34. We assign a P/FCF multiple of 16x to our CY201FCF/share of $2.31 to reach $37. Due to stabilization in the PC markepotential lift in premium mix in consumer segment, and more confidence in leaner cost structure going forward, we are assigning modestly high

P/Cash flow multiples to MSFT.YHOO: We reach our $22 PT by assigning 9.5x to our 2010E EBITDA peshare of $1.59 (assuming $0.30 incremental from MSFT search deaadjusting for $3.22 per share in net cash for 2009 and $3.53 in off-balancsheet assets (Yahoo! Japan and Alibaba post illiquidity discount and tax anNOLs). We are assigning a modestly higher multiple to YHOO because orecovery in E-Commerce and online advertising and because Yahoo! screenmuch better now as a fundamental improvement story.

Investment Risks

GOOG: 1) Googles competition is getting more intense; 2) Google is still one-trick pony with nearly 94% revenue coming from search; 3) Executiorisk with recent acquisitions; 4) Google is vulnerable to threats frocomputing platforms, browsing technologies, and ad blocking technologie5) Cap-Ex spending continues to be very high; 6) Rising cost of revenue; 7Privacy issues and click fraud continue to be a nagging problem; 8) Confliof interest with Checkout and Google Analytics; 9) More experienced searcmarketers are diverting part of search ad dollars to search enginoptimization.

MSFT: 1) Competition; 2) Slowing PC market growth; 3) Disappointinramp-up of the online business so far; 4) Piracy; 5) Investment mode; 6Cloud Computing/SaaS; 7) Virtualization; 8) Exposed to macro-economheadwinds.

YHOO: 1) Increasing competitive pressure from Google and others; 2Current growth materially lower than overall Internet ad growth; 3) Limitetraction internationally; 4) Mass talent attrition; 5) Execution risk with receacquisitions; 6) Future business strategy not fully firmed up.

Page 2 | Google Inc. | January 13, 2010


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01/11/10

GOOG - P&L Trends

Growth Analysis Y/Y 3/09 6/09 9/09A 12/09E 3/10E 6/10E 9/10E 12/10E 2008A 2

Gross Revenue Y/Y 6% 3% 7% 15% 19% 17% 14% 15% 31%

Net Revenue Y/Y 10% 5% 8% 15% 19% 18% 15% 15% 36% 1

Operating Expenses Y/Y 2% -5% -4% -27% 18% 17% 16% 15% 57% -

EBITDA Y/Y 19% 13% 15% 21% 19% 19% 14% 15% 34% 1

PF Operating Income Y/Y 18% 17% 24% 24% 22% 20% 15% 16% 30% 2

GAAP EPS (Recurring) Y/Y 9% 19% 26% 354% 20% 13% 8% 15% 0% 4

Non-GAAP Net Income Y/Y 6% 16% 21% 24% 21% 15% 10% 17% 26% 1

PF EPS Y/Y 7% 16% 20% 23% 20% 14% 9% 15% 25% 1

Growth Analysis Q/Q

Gross Revenue Q/Q -3% 0% 8% 10% 0% -1% 5% 11% --

Net Revenue Q/Q -3% 0% 8% 11% 0% -1% 5% 11% --

Stock-Based Compensation Q/Q -3% 6% 8% 5% 5% 4% 4% 4% --

Operating Expenses Q/Q -37% 0% 5% 9% 2% 0% 4% 8% --

Other Cost of Revenue Q/Q -6% -2% 2% 13% 1% -2% 5% 10% --

Research & Development Q/Q -14% 11% 7% 4% 0% 1% 3% 8% --

Sales & Marketing Q/Q -17% 10% 6% 11% 5% -1% 5% 6% --

General & Administrative Q/Q 9% -21% 6% 14% 0% 0% 5% 9% --

Margins Analysis (% of net rev)

Operating Margin - Net 46.2% 46.0% 47.3% 47.9% 47.0% 46.5% 46.7% 48.1% 34.9% 4

PF Operating Margin - Net 53.1% 53.2% 54.5% 54.8% 54.2% 54.1% 54.2% 55.1% 48.9% 5

Incremental PF Op Inc. Margin - Net 89.5% 179.4% 136.6% 80.2% 59.8% 58.4% 52.1% 57.4% 42.9% 10

EBITDA Margin - Net 63.0% 62.5% 63.2% 62.9% 62.6% 62.6% 62.6% 62.9% 58.3% 6

Incremental EBITDA Margin - Net 107.3% 171.0% 106.3% 81.5% 60.5% 63.3% 59.2% 63.2% 55.5% 10

EBITDA Margin - Gross 47% 46% 47% 47% 46% 47% 47% 47% 42% 4

Incremental EBITDA Margin - Gross 124% 194% 89% 61% 45% 50% 46% 48% 45% 9

Expense Analysis (% of net rev)

TAC 35.3% 35.7% 35.6% 35.0% 35.0% 34.2% 34.6% 34.7% 37.5% 3

Other Cost of Revenue 16.0% 15.8% 14.9% 15.2% 15.3% 15.1% 15.2% 15.1% 16.7% 1

Research & Development 11.6% 12.9% 12.8% 12.0% 12.0% 12.2% 12.0% 11.8% 13.0% 1

a es ar e ng . . . . . . . . .

General & Administrative 10.1% 8.0% 7.9% 8.1% 8.1% 8.2% 8.2% 8.1% 10.5% 8

Stock-Based Compensation 6.8% 7.2% 7.2% 6.8% 7.2% 7.5% 7.5% 7.0% 7.1% 7

D&A 9.9% 9.3% 8.6% 8.1% 8.4% 8.6% 8.4% 7.8% 9.5% 8

Tax Rate 25% 20% 21% 25% 25% 25% 25% 24% 28% 2

Tax Rate (Excl. Stock Comp) 13% 8% 9% 14% 14% 13% 13% 14% (6%) 1

Source: Company reports; Collins Stewart LLC estimates



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01/11/10

GOOG - FX Analysis

($ Thousands)

2009E 2010E Annual

3/09 6/09 9/09A 12/09E 3/10E 6/10E 9/10E 12/10E 2008A 2

Reported Gross Revenue 5,508,990 5,522,897 5,944,851

Reported Net Revenue 4,073,030 4,069,543 4,385,635

Non Organic Y/Y Growth 10% 5% 8%

Non Organic Q/Q Growth -3% 0% 8%

FX Impact Y/Y (Gross) (429,000) (497,000) (297,000)

FX Impact Y/Y (Net) (317,178) (366,214) (219,103)

FX Adjusted Net Revenue 4,166,208 4 ,311,757 4,565,738

Organic Y/Y Growth 13% 11% 13%

FX Impact Q/Q (Gross) (120,000) 44,000 166,000

FX Impact Q/Q (Net) (88,721) 32,421 122,462

FX Adjusted Net Revenue 4,091,751 4 ,037,122 4,224,173

Organic Q/Q Growth -3.0% -0.9% 3.8%

Source: Company reports; Collins Stewart LLC

04/07/08

GOOG - Organic and Proforma Revenue Analysis

($ Thousands)

2009E 2010E Annual

3/09 6/09 9/09A 12/09E 3/10E 6/10E 9/10E 12/10E 2008A 2

Net Rev (inc. acq since March '08) $4,073,030 $4,069,543 $4,385,635 $4,855,799 $4,860,254 $4,819,877 $5,052,064 $5,589,968 $15,856,598 $17,3

Y/Y Growth 10.1% 4.5% 8.4% 15.1% 19.3% 18.4% 15.2% 15.1% 36.0% 9

Acquisitions Contribution $70,000 $65,000 $70,000 $72,500 $80,000 $82,500 $85,000 $88,000 $235,000 $27

DoubleClick (exc Performics from Q2-08) $70,000 $65,000 $70,000 $72,500 $80,000 $82,500 $85,000 $88,000 $235,000 $27

Other $0 $0 $0 $0 $0 $0 $0 $0 $0

Organic Rev (exc DoubleClick - not FX adj) $4,003,030 $4,004,543 $4,315,635 $4,783,299 $4,780,254 $4,737,377 $4,967,064 $5,501,968 $15,621,598 $17,1

Y/Y Growth 8.8% 5.0% 8.5% 15.2% 19.4% 18.3% 15.1% 15.0% 34.0% 9

Acquisitions Historical Revenue $0 $0 $0 $0 $0 $0 $0 $0 $50,000

DoubleClick $0 $0 $0 $0 $0 $0 $0 $0 $50,000

Others $0 $0 $0 $0 $0 $0 $0 $0 $0

Proforma Rev $4,073,030 $4,069,543 $4,385,635 $4,855,799 $4,860,254 $4,819,877 $5,052,064 $5,589,968 $15,906,598 $17,3

Y/Y Growth 8.6% 4.5% 8.4% 15.1% 19.3% 18.4% 15.2% 15.1% 32.9% 9




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01/11/10

GOOG - Other Business Metrics

2009E 2010E Annual

3/09 6/09 9/09A 12/09E 3/10E 6/10E 9/10E 12/10E 2008A 2

Headcount 20,164 19,786 19,665

Seq. Additions (58) (378) (121)

Y/Y Growth 5% 1% -2%

Q/Q Growth 0% -2% -1%

Annualized Gross Revenue per Headcount $1,092,837 $1,116,526 $1,209,225

Y/Y Change 1% 2% 10%

Annualized Net Revenue per Headcount $807,981 $822,712 $892,069

Y/Y Change 5% 4% 11%

Annualized Operating Profit per Headcount $373,654 $378,832 $421,809

Y/Y Change 16% 18% 29%


01/11/10

GOOG - Key Financial Metrics

($ Thousands)

2009E 2010E Annual

3/09 6/09 9/09A 12/09E 3/10E 6/10E 9/10E 12/10E 2008A 2

Net Cash & Equivs. 17,784,933 19,344,006 21,994,391 24,044,938 26,180,320 28,317,415 30,451,063 32,695,753 15,845,771 24,0

Seq. Change 1,939,162 1,559,073 2 ,650,385 2,050,547 2,135,382 2,137,094 2,133,649 2 ,244,690 1,627,158 8,19

Net Cash & Equivs. Per Share $56.06 $60.73 $68.79 $74.97 $81.31 $87.58 $93.73 $100.16 $49.91 $7

OCF 2,249,512 1,609,172 2,725,983 2,291,766 2,458,781 2,423,856 2,452,281 2,653,059 7,852,854 8,8

Y/Y Growth 26% -9% 25% 8% 9% 51% -10% 16% 36% 1

Capex 262,755 139,437 186,339 278,629 360,757 323,525 357,001 451,921 2,358,461 86

Y/Y Growth -69% -80% -59% -24% 37% 132% 92% 62% -2% -

Capex as % of Gross Revenue 4.8% 2.5% 3.1% 4.3% 5.5% 5.0% 5.3% 6.0% 10.8% 3

FCF = OCF - Capex 1,986,757 1,469,735 2,539,644 2,013,137 2,098,024 2,100,331 2,095,280 2,201,138 5,494,393 8,0

Y/Y Growth 112% 38% 47% 15% 6% 43% -17% 9% 63% 4

FCF per Share $6.26 $4.61 $7.94 $6.28 $6.52 $6.50 $6.45 $6.74 $17.30 $2

Y/Y Growth 112% 37% 46% 13% 4% 41% -19% 7% 62% 4

GAAP EPS $4.49 $4.66 $5.13 $5.48 $5.38 $5.27 $5.55 $6.32 $13.31 $

Y/Y Growth 9% 19% 26% 354% 20% 13% 8% 15% 0% 4

EBITDA 2,564,296 2,543,921 2,769,868 3,052,173 3,040,451 3,018,766 3,164,341 3,516,196 9,251,622 10,9

Y/Y Growth 19% 13% 15% 21% 19% 19% 14% 15% 34% 1

EBITDA per Share $8.08 $7.99 $8.66 $9.52 $9.44 $9.34 $9.74 $10.77 $29.14 $3

Y/Y Growth 19% 13% 14% 19% 17% 17% 12% 13% 33% 1

OCF/EBITDA (TTM) 85% 81% 84% 81% 80% 83% 78% 78% 85% 8

FCF/EBITDA (TTM) 67% 69% 74% 73% 71% 74% 68% 67% 59% 7




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Important Disclosure / Disclaimer Information

Other Public Companies Mentioned in this ReportCompany Ticker Price Recommendation

Microsoft Corp. MSFT $30.07 BUYYahoo! Inc. YHOO $16.68 BUY

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Google Inc.

Price Recommendation Change Price Target Coverage Transfer

Created By BlueMatrix

Ticker Date Action Prior Rating Current Rating Price Target Price

GOOG 2009-10-16 Raising Target Price BUY BUY $549.85 $635.00



GOOG 2009-02-23 Lowering Target Price BUY BUY $330.06 $435.00




GOOG 2008-10-03 Lowering Target Price BUY BUY $386.91 $575.00GOOG 2008-04-18 Raising Rating HOLD BUY $539.41 $615.00

GOOG 2008-04-15 Initiation of Coverage NA HOLD $446.84 NA



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Microsoft Corp.




MSFT 2009-12-14 Raising Target Price BUY BUY $30.11 $36.00

MSFT 2009-10-26 Raising Target Price BUY BUY $28.68 $35.00MSFT 2009-07-24 Lowering Target Price BUY BUY $23.32 $29.00



MSFT 2009-01-23 Lowering Target Price BUY BUY $16.88 $23.00




MSFT 2008-07-28 Initiation of Coverage NA BUY $24.76 $33.00

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Yahoo! Inc.




YHOO 2009-10-21 Raising Target Price BUY BUY $17.66 $22.00


YHOO 2009-07-30 Lowering Target Price BUY BUY $14.60 $18.50


YHOO 2008-11-04 Raising Rating HOLD BUY $13.35 $18.00

YHOO 2008-05-15 Raising Rating SELL HOLD $27.75 NA

YHOO 2008-05-05 Lowering Rating & TP BUY SELL $24.37 $23.00

YHOO 2008-04-16 Initiation of Coverage NA BUY $28.31 $33.50

Collins Stewart LLC Ratings

Collins Stewart LLC assigns research equity ratings of Buy, Hold or Sell. For Buys, we will publish a 12-month price target for any stock with an estimated appreciation potential of 20% more. For Sells, we also publish a 12-month price target for any stock with an estimated underperformance potential of 20% or more.



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Buy: 12 months, estimated 20% or more appreciation

Hold: 12 months, between 20% appreciation and 20% decline expected.

Sell: 12 months, estimated 20% or more decline.

US Disclaimers

This report is for informational purposes only, and the information herein is obtained from sources that we believe to be reliable, but its accuracy and completeness, and that of thopinions based thereon, are not guaranteed. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Further, this report is no

intended as an offer or solicitation to buy or sell any securities or related instruments. The investments discussed or recommended in this report may not be suitable for the speciinvestment objectives, financial situation or needs of the reader, and should not be relied upon without consultation with an investment professional. Opinions expressed in this report arsubject to change without notice. Collins Stewart LLC accepts no liability whatsoever for any loss or damage of any kind arising out of the use of any par t, or all, of this report. This reporfor distribution only under such circumstances as may be permitted by applicable law, and may not be reproduced or distributed in any form without the specific consent of Collins StewaLLC. Redistribution of this, via the Internet or otherwise, report without permission is specifically prohibited, and Collins Stewart LLC accepts no liability for the actions of third parties in tregard.

From time to time, Collins Stewart LLC or its employees may have a long or short position in the securities of company (ies) discussed herein and, at any time, may make purchaseand/or sales as principal or agent.

% of CSTI Universe withthis rating

% of rating tier for which CSTIprovided IB services

Buy 42% 0%

Hold 53% 0%

Sell 5% 0%

The research analyst who is primarily responsible for the research contained in this research report and whose name is listed first on this report: (1) attests that all of the views expressin this research report accurately reflect that research analyst's personal views about any and all of the securities and issuers that are the subject of this research report; and (2) attesthat no part of that research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in th

research report.All Collins Stewart LLC ("CSTI") employees, including research associates, receive compensation that is based in part upon the overall performance of the firm, including revenugenerated by CSTI's investment banking department.

Footnotes for CSTI, a member of SIPC and NASDCSTI makes a market in GOOG, MSFT and YHOO securities. CSTI, in its market making capacity, sells to or buys from customers the securities of these companies in the past 12 monthon a principal basis.

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