Tài liệu Nothing But Net 2009 Internet Investment Guide 2 docx

11
Global Equity Research
05 Januar
y 2009
Imran Khan
(1-212) 622-6693

• Sales of virtual goods, which can further the depth of the user experience
on a social site;
• A model that exposes a site to the classifieds or eCommerce markets, both
of which are gaining market share from their offline counterparts; and
• Paid premium memberships or selling a la carte paid features (such as
the ability to post more or higher-quality photos).
Several sites are already pursuing a variety of these approaches (both LinkedIn and
Classmates, e.g., sell premium memberships). We expect much more
experimentation as the market continues to mature.
Mobile Is Long-term Interesting, but Near-term Challenging
With 84% of Americans using mobile phones (CTIA), we firmly believe the mobile
market is a promising opportunity. Given this level of reach and better mobile
Internet technologies and hardware, we think this medium is becoming attractive to
advertisers. As a result, Google, Yahoo!, and MSN are strategically focusing on
establishing market share in this industry.
Figure 6: Technology Penetration in the US (2008)
as labeled
0.00%
20.00%
40.00%
60.00%
80.00%

100.00%
PC Mobile Mobile Web
Subscribers
Mobile Internet Users
0
50
100
150
200
250
300
Usage (M) Penetration

Source: CIA Government Stats ( (Feb 2008); International
Telecommunications Union ( CIA Government Stats
( (Mar 2008) for Vietnam and Hong Kong mobile phone data, "OECD
Broadband Statistics to June 2007", OECD; www.point-topic.com; mybroadband.co.za; Hong Kong and India government statistics;
European Travel Commission; www.bezeq.co.il; Santiago Times newspaper; Nielsen Mobile data, JPMorgan Estimates
However, although mobile phone penetration is high, the mobile search market is in
the early adoption stage. In 1Q’08, only 15.6% of wireless subscribers were using
mobile Internet services, according to Nielsen Mobile data. Even within this small
subset of mobile Internet users, usage drastically trails that on PCs. Nielsen Online
reports that the PC Internet user visits more than 100 domains per month, whereas
mobile Internet users visit 6.4 individual websites per month, on average.
We think mobile Internet adoption will not accelerate until the introduction of better
phones and technologies. 3G networks perform up to 6x faster than prior mobile
Internet networks (Nielsen), which we think will greatly improve the user experience
and make it more comparable to that on a PC. Additionally, new phones such as the
iPhone have improved the size and resolution of the screens. However, we note that

12
Global Equity Research
05 Januar
y 2009
Imran Khan
(1-212) 622-6693

smart phone technology has not yet become the norm and uptake of mobile Internet
likely has a ways to go.
Additionally, we find it unlikely that advertisers will quickly be adopting mobile
advertising. In addition to not having the scale and reach of the Internet, mobile
advertising is difficult, as it involves dealing with multiple ad networks and mobile
service providers and creating ads that can be viewed on small screens. Furthermore,
we think advertisers will cut back on experimental models of ad spend in the face of
this economic recession.
M&A: Slow in 1H’09, but Could Pick Up in 2H
We believe M&A activity is likely to remain quite slow in the first half of the year as
companies and management teams try to understand the scope and length of the
economic downturn.
Further, we think sellers are likely to be resistant to sales at reduced valuations, and
may prefer stock transactions that expose them to upside in the event of an eventual
turnaround.
Additionally, we think companies are likely going to exercise caution in parting with
any cash on their balance sheets – whether for acquisitions or for share buybacks.
We have already seen some of this caution manifest itself this year, when the ten
largest companies in the Internet/media space (see table below) spent 66% of their
TTM Free Cash Flow on share buybacks (compared to the equivalent figure of 126%
a year ago.)

The companies remained relatively acquisitive, although two of the largest
acquisitions were originally announced in 1H’07 (News Corp.’s $5.1B cash payout
for Dow Jones and Google’s $3.2B cash payout for DoubleClick). Excluding those
deals, cash acquisitions would have been relatively flat Y/Y, at 28% of free cash
flow, in line with the equivalent figure a year ago.
Table 2: At Largest Internet and Media Companies, Buybacks Less Popular
$ in millions
FCF Cash Acquisitions Cash Buybacks
GOOG 4,707 72% 0%
YHOO 1,386 60% 22%
AMZN 970 45% 0%
EBAY 2,456 29% 102%
TWX 5,946 52% 14%
DIS 4,767 14% 93%
NWS 2,049 263% 40%
VIA 969 24% 175%
CBS 1,487 137% 3%
MSFT 15,654 19% 103%
Total (3Q’08 TTM) 40,390 49% 66%
Total - year ago (3Q’07 TTM) 38,853 28% 126%
Source: Company reports, J.P. Morgan estimates
We believe some deal activity is likely to recover by the second half of ’09, assuming
the environment stabilizes somewhat, and management teams feel more comfortable
with the outlook.
For CBS and MSFT, estimates
used in this section are from J.P.
Morgan analysts Michael Meltz,
CFA and John DiFucci,
respectively.

13
Global Equity Research
05 Januar
y 2009
Imran Khan
(1-212) 622-6693

To the extent acquirers are willing to part with cash, we expect them to have the
resources: large Internet and media companies continue to generate significant cash
flows. At the four large-cap Internet companies, we are modeling a significant
deceleration in Y/Y FCF growth for F’09: from 36% in F’08E, we expect only 12%
Y/Y FCF growth at the four largest Internet firms in our coverage. Including the
Media universe, the respective expectations are for 13% growth in ’08 and 5% in ’09.
Including Microsoft, J.P. Morgan estimates call for nearly $40B in FCF generated in
the broader Internet space.
Table 3: We Project $10B+ in FCF at Large Internet Companies
$ in millions
2007 2008E 2009E
GOOG 2,272 4,825 6,086
YHOO 1,352 1,699 1,056
AMZN 1,184 661 1038
EBAY 2,187 2,351 2,472
TWX 4,045 5,135 6,017
DIS* 3,832 3,868 3,588
NWS* 2,802 2,482 1,951
VIA 1,539 1,608 1,705
CBS 1,983 1,324 1,257
MSFT 19,652 15,528 14,831
Total 40,848 39,482 40,002

Y/Y Growth -3% 1%
All excluding MSFT 21,196 23,954 25,171
Y/Y Growth 13% 5%
Large-Cap Internet 6,994 9,537 10,652
Y/Y Growth 36% 12%
Source: Company reports and J.P. Morgan estimates.
Note: For Disney, News Corp., fiscal year data used rather than calendar year; MSFT CY’08 FCF impacted by a $3.1B cash tax
payment.
We continue to see three key factors as motivating factors for M&A activity:
• Traffic. Developing high-traffic sites is difficult, and larger companies are often
willing to pay for sites that have proven an ability to generate traffic.
• Technology. Companies that develop a technology that is difficult or
uneconomical to replicate are often targets for acquisitions; such companies may
also generate traffic but the technology is often a motivator for the buyer.
• Transactional. Companies with a proven track record of revenue and sales
generation can make attractive targets, as well; an example of a transactional-
focused acquisition is the 2007 purchase of Mezimedia by ValueClick.
We Think an IPO Market Recovery Is More Likely in 2010
The IPO market was virtually nonexistent through most of F’08, with Rackspace as
the lone significant deal in the Internet and Internet-related sector; compared to 13
such deals in F’07 (see chart below).



14
Global Equity Research
05 Januar
y 2009
Imran Khan
(1-212) 622-6693

Table 4: Internet and Related IPOs, F’07 and F’08
Units as indicated
Pricing Date Issuer Name Symbol Amt ($M) Mkt cap ($M) % mcap Offering Price Price, 12/30 Performance
06/26/07 Comscore Inc SCOR 101 457 22% 16.50 12.19 -26%
10/02/07 Constant Contact CTCT 123 433 28% 16.00 12.84 -20%
07/17/07 Dice Holdings Inc DHX 221 805 27% 13.00 4.11 -68%
03/21/07 Glu Mobile Inc GLUU 86 327 26% 11.50 0.39 -97%
11/16/07 Internet Brands Inc INET 48 334 14% 8.00 5.51 -31%
06/07/07 Limelight Networks Inc LLNW 276 1,192 23% 15.00 2.29 -85%
08/09/07 MercadoLibre Inc MELI 333 752 44% 18.00 15.69 -13%
07/19/07 Orbitz Worldwide Inc OWW 510 1,244 41% 15.00 3.65 -76%
07/25/07 Perfect World Co Ltd PWRD 217 894 24% 16.00 16.68 4%
02/15/07 Salary.com Inc SLRY 69 158 44% 10.50 2.11 -80%
05/16/07 TechTarget Inc TTGT 115 508 23% 13.00 3.90 -70%
02/08/07 U.S. Auto Parts Network Inc PRTS 115 298 39% 10.00 1.37 -86%
03/08/07 Xinhua Finance Media Ltd XFML 300 883 34% 13.00 0.55 -96%
08/07/08 Rackspace Hosting RAX 188 1,460 13% 12.50 5.59 -55%
Source: Company reports, FactSet, J.P. Morgan estimates
We think the market climate is unlikely to moderate significantly in the near term in
order for the IPO window to reopen soon. Given the lead time involved in most deal
activity, we think it is therefore more likely that it will not be until 2010 that the IPO
market starts to show signs of a recovery.
Our Top Picks
We think the significant declines in share prices in the stock market create
opportunities to buy the best positioned companies at a reasonable valuation. In our
coverage universe, we think Google (Price Target $430), Amazon (Price Target $65),
Priceline (Price Target $86), Baidu (lead analyst Dick Wei; Price Target $300), and
MercadoLibre (Price Target $24) are the best positioned global Internet companies
and offer the best risk/reward return for investors. Please see the appropriate

company sections for a detailed analysis of our thesis.


15
Global Equity Research
05 Januar
y 2009
Imran Khan
(1-212) 622-6693

Dot.Khan’s Top Ten Things to Watch for in
2009
1. Potential search deal likely between Yahoo! and Microsoft
2. Net Neutrality should become an important mainstream issue
3. Performance-driven advertising should continue to rise
4. Challenges in monetizing video advertising should persist
5. Mobile usage should continue its strong growth momentum, but mobile
advertising will likely be challenging this year
6. Amazon’s low pricing strategy should continue to bring value seeking
customers
7. Possible bankruptcies in brick-and-mortar retail should create opportunities
for eCommerce companies
8. CPMs should remain under pressure
9. Consolidation activities could potentially resume during 2H’09
10. Promotional activity in the OTA space should increase