Google (GOOG)

April 06, 2009 TECHNOLOGY (INTERNET INFORMATION PROVIDER) Henry Fund Research GOOGLE (GOOG) Arindam Majumdar arindam-majumdar@uiowa.edu Investment Recommendation Current Price Target Price HOLD $367.87 $393.04 INVESTMENT THESIS (+)Online Advertising - Google is the market leader in online advertising revenue. In the year 2008, online ad-revenues accounted 96.94% of its revenues. This was an increase of 28.73% as compared to 2007. We believe that Google’s ad revenues will be affected by the recession with a CAGR of 25% for the next couple of years and finally leveling out to a terminal value of 15%. 1 (+)Product Innovation - Recognizing the need for product innovation, Google has been increasing its investing in R&D. As of 2008 its R&D expense was $2.8 Billion, 12.8% of its total revenue generated. The results of these investments have been visible with Google launching Google-Chrome, Google’s internet explorer. This open-source internet browser will most definitely challenge the dominance of Microsoft's Internet Explorer, but more importantly heralds the dawn of cloud computing (Using distributed data centers across the internet as a composite data center for computing and data storage activities) - an innovation that looks set to make the PC redundant. (-)Threat from new Innovations - Google's success has been driven by the simplicity and effectiveness of its search engine, which indexes searches by relevance for users in a very short space of time. Google's search engine is the world's most popular search engine and the term "to Google", meaning to search using the internet, has become part of the vernacular. A challenge that any technology company, particularly Google faces is the low entry barriers in the industry and the ability of an entrepreneur charting a similar path such as Google and developing a search engine which is smarter than the current offerings in the market. (-)International Markets exposure - International revenues accounted for approximately 51% of Google’s total revenues in 2008, and more than half of its user traffic came from outside the U.S. during this period. This increases Google’s risk exposure because: Some of the country in which Google operates have longer payment cycles Increased uncertainty regarding liability of services and content. http://www.google.com/finance?q=NASDAQ:GOOG Key Stock Statistics 52-Week Price Range Market Capitalization (B) Shares Outstanding (M) 60-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth $247.30-$602.45 $115.53 315.29 1.19 NA 27.5 4.13 5.35 14.52% 16.60% 19.30% EPS ($) Year EPS 2006 10.21 2007 13.53 2008 16.50 2009E 21.76 2010E 22.34 2011E 26.56 All earnings represent earnings from operations and have been filtered from net nonrecurring gains. Valuation Models Discounted Cash Flow-EP Relative P-E Relative PEG $393.04 $387.22 $428.53 Important disclosures appear on the last page of this report. Henry Fund Research EXECUTIVE SUMMARY The search engine industry includes organizations developing and operating search engines, internet portals and other websites that host advertising content. Normally these sorts of websites provide services such as internet search, electronic mail, online news, social networking portals and other forms of entertainment such as instant messaging and online gaming. The business model of such enterprises is based on the efficiency of their search algorithms and ad-sensing application. Websites earn the vast majority of their income from advertisements that are placed on their sites. Income is generated when a user clicks on an advertising link. This is 2 known as a "paid click". THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Data from – Pint In the Mix12 We believe that the search engine industry has been and will To put more clarity on the break up of the advertising industry, continue to be affected by the recession. This is due to the the chart below lists out the various channels and the relevant decrease in revenue earned from advertising channels for advertising revenue as of 2008 for each channel. such companies. This is a direct consequence of the decrease in overall business expenditure on advertising as companies look to cut costs in the face of declining household consumption. Data from - Google S&P Report 20087 Data from – Tech Crunch13 The above data shows the relative strength of the subIndustry as compared to the S&P 500. Despite the negative outlook on the decreased ad spending by organizations, we also believe that the tightening marketing budgets will force companies to hasten the advertising migration trend from print, radio and television to search engines. The chart below shows the distinct shift towards more non-traditional sources of advertising. The $23.4 billion in annual internet advertising spending exceeded advertising on cable TV for the first time (which was $21.4 billion), and took the No. 3 spot behind national and local TV ads ($29.8 billion) and newspaper ads ($34.4 billion). This trend is because the industry is a cheaper means of advertising, so the downturn will see search engines capture a greater share of the advertising dollar. As has been witnessed across business verticals, we envisage that the decreasing marginal revenues will force consolidations in the industry, creating opportunities for firms such as Yahoo, Google, AOL and Microsoft to capture increased market share. Google has transformed itself from a search engine company to be an integral part of any users “online experience”. From 2 Henry Fund Research being a technology company, to being included in the Webster dictionary as a verb, Google’s journey has been one of the highlights of the internet age. With revenues of nearly $17 billion, profits of $5 billion and a global workforce of more than 19,000 employees, Google is a behemoth in the internet information providers industry. But we think that what makes Google unique and probably a more sustainable e-business company is its penchant for innovation and ability to invest and develop tangible user friendly products. The example of this would be Google’s internet browser – Chrome and its mobile operating system – Android. In addition to its strategy of investing in in-house development and organic growth, Google also has had major acquisition in the past, thus diversifying its online product offering. The most notable of these are the web video provider, YouTube th (acquired 4 quarter of 2006 fiscal year) and the ad-serving specialist DoubleClick. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management involvement of Google’s founders and was therefore published as research. We think that the strength of PageRank lies in the fact that it is a query independent technique for determining the importance of web pages by looking at the link structure of the web. This enables PageRank to treat a link from a web page X to web page Y as a “vote” cast by page X in favor of page Y. The final web-page rank of a page is the sum of the pages that link to it. The PageRank of a web page also depends on the importance (or PageRank) of the other web pages casting the votes. Votes cast by important web pages with high PageRank weigh more heavily and are more influential in deciding the PageRank of pages on the web. This unique innovation has been instrumental in Google emerging as the market leader as far as web-based search engines are concerned. Search Text-Matching Techniques – Google’s text searching technology employs text-matching techniques that compare search queries with the content of web pages to COMPANY DESCRIPTION help determine relevance. We believe that this text-based Google is a technology leader in the internet information scoring technique determines the proximity of individual providing industry. The Google search engine is the single search terms to each other on a given page, and prioritizes most powerful search engine on the World Wide Web. Google the results that have the search terms near each other. We search engine has become more sophisticated, trying to estimate that by combining query independent measures incorporate almost human-level artificial intelligence in its such as PageRank with the unique text-matching techniques, algorithms, making search results more relevant to the Google is to deliver search results that are most relevant to requirements of the user. Search results are also no longer what people are trying to find. restricted to web-pages, they include images, videos, books, Hardware Infrastructure – We believe that the other key maps and more. strength in Google’s business model is that it provides its Google’s other online product offerings are email (Gmail); products and services using its own homegrown software and Google News; a shopping search (Froogle – now known as hardware infrastructure, which provides substantial computing Google Product Search); mapping services; a satellite resources at low cost and negates the dependence on 3rd imagery service (Google Earth) and many more. In fact party data centers. We also believe the Google’s current Google often make products available early in their infrastructure also shortens its product development cycle and development stages by posting them on Google Labs, at test ensures that it is able to pursue innovation more cost locations online or directly on Google.com. If Google’s users effectively. find a product useful, Google promotes it to “beta” status for additional testing. Once it is satisfied that a product is of high Despite all the technology innovations and engineering quality and utility, the product is removed from the beta label wizardry, what determines Google’s success is its ability to and turned into it a core Google product. This model ties in convert its technology edge over its rivals into strong cash Google’s core principles of innovation and adding maximum flows. It might difficult for many old-economy analysts to value to the consumer’s online experience and we believe this grasp Google’s ability to maintain its cash balances despite strive for innovation is key to Google’s success. any tangible product offering and supposedly driven just by We believe that the key ingredient of Google’s success has been its superiority over its competition with respect to technology utilization and commercialization. Therefore it is necessary that we talk briefly about the technologies that are driving Google’s success in the search engine vertical and its innovation in development of various user products and services. Ranking of Website Searches - The technology used by Google for its web pages ranking is called PageRank. PageRank was developed at Stanford University with the advertising revenues. In fact to illustrate its dependence on ad-revenues, please refer to the below attached chart which clearly suggests that Google’s survival is critically dependant on its ability to cash in on all the online advertisements that it hosts. 3 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management their prescription history to an online Google Health account. The success of this application will be key to Google’s entry into the technology healthcare sector. This deal is similar to Google’s project with IBM where IBM Corporation, in collaboration with Google Inc. and the Continua Health Alliance, announced new software that will enable personal medical devices used for patient monitoring, screening and routine evaluation to automatically stream data results into a patient's Google Health Account or other personal health record (PHR). - The recently released January comScore data shows that GoogTube (Google/YouTube) competition with continues to lead its Data from - Google Annual Report 20083 Having determined the criticality of the advertising dollars for Google, it is imperative that briefly mention the technology that is driving this revenue model. The company’s AdWords program is a pay-per-click model where ads appear alongside search results. Businesses use its AdWords program to promote their products and services with targeted advertising. In addition, the thousands of third-party Web sites that comprise the Google Network use its AdSense program to deliver relevant ads that generate revenue and enhance user experience. - Data from – comScore.com5 respect to online viewership. This clearly suggests that Google’s acquisition of YouTube has been a synergy which has added vertical and horizontal value to Google’s business. Above is attached a snap shot of January’s comScore results. To illustrate how Google’s web entertainment segment is outperforming the market, here is another chart displaying the RECENT DEVELOPMENTS We believe that one of the critical factors that determine success and longevity in the technology sector is the ability to recognize growth areas and implement solutions to facilitating services in those areas. One of Google’s goodwill and growth cornerstones has been its ability to innovate. Some of the recent developments illustrate Google’s continuing commitment to its core principles. - Google’s Strengthening Health Platform : With the new Obama administration focus on revamping the state healthcare offerings by proposing a $50 billion aid to the sector. This provides service providers in the healthcare industry with unprecedented growth opportunities. With the increased emphasis on leaner operations and cost cutting in all industries, the health care industry is no exception to this rule. This provides technology companies with the unique Data from Nielsen Online - Video Census opportunity to implement process automations in the healthcare industry. We believe that Google has recognized this growth opportunity and hence its announcement of US web based video census per brand. YouTube continues to significantly overpower its competition. teaming up with CVS comes as no surprise. With this tie-up, millions of CVS customers would be able to easily transfer 4 4 Henry Fund Research We can infer from the data provided that Google’s diversification in the online video sector will continue to be beneficial for the firm. Also we need to note that the inflated numbers in the above chart is a reflection of the presidential elections and the inauguration. But despite that, GoogTube’s dominance in that sector cannot be denied. - The proposed merger of Microsoft with Yahoo, in a clear attempt by Microsoft to complete against Google in the online ad revenues market fell through. We think that Google’s entrenched position in the online ad revenues market will not be threatened in the near future. The chart below displays Google’s position as the market leader in the online ad revenues business. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management We believe that the key driver of the search engine market in the US, will continue to be online advertising spending. According to eMarketer the estimated market for online advertising in the US in 2009 will be $29.5 billion. Below is attached a chart displaying the historical and forecasted figures for online ad spending. Data from ADWEEK Given this statistic, we believe that the trend in the search engine industry will be to streamline algorithms to capture the “pay-per-click” of online site visitors. We also believe that one of the key advantages that the Search Engines industry has over media substitutes such as television, radio and print is that it is still relatively a newer player in the entertainment industry. But the popularity of this medium continues to increase, particularly given the continued increase in broadband connections in the US. IBISWorld2 anticipates that broadband subscriptions will exceed 131 million in 2013 from around 109 million in 2008, with an increasing share being accounted for by fiber, high speed cable lines and most importantly, mobile wireless connections. We think that the mobile wireless market is particularly important for this industry especially for Google. According to Nielsen mobile Internet penetration is highest in the U.S., where 15.6% of wireless subscribers use the Internet on their mobile devices. The chart below shows the top 10 countries browsing the mobile web. This clearly shows the potential that these companies have in the US. Source – Techcrunch.com - In addition to using Android on one of its cell phones, TMobile is planning to further penetrate the retail consumer market by powering its various other communication devices with Android. We feel that this positions Google to compete with Microsoft, Apple and Symbian in the smart phone business vertical which we believe will be one the key drivers of growth in the technology sector in the years to come.6 - To further testify Google’s mantra of continuing to diversify its product offerings, Google is believed to be in talks with Twitter for a proposed merger. This will not only broaden Google’s services, it will also add value to its application with Twitter’s real time algorithms. We believe the market will react favorably to this acquisition, causing Microsoft and yahoo increased strife. INDUSTRY TRENDS Data from Bango News 5 Henry Fund Research The mobile web is accessed through hand held devices extend to PDAs, cellular phones and other non-PC devices. In fact according to Gartner, sales of smartphones will jump 28 percent in 2009 after growth slowed to just 3.7 percent in the fourth quarter due to weakening economies and lack of attractive new models. Therefore we feel it is imperative for enterprises such as Google to focus their R&D spending on developing applications and services enhancing a user’s online mobile experience. The other sector of innovation and growth in the sector is the availability of streaming audio visual content over the internet. This is closely coupled with the internet access speeds available to retail customers. The chart below the growth rates for US broadband subscribers for the years 2010-2013. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Data from IBIS-World Google also has one of the highest P/E ratios in its peer group, second only to Apple. This suggests there is a lot of pressure on Google’s equity to return higher growth figures as compared to its competition. Additionally Google’s ROE is also lower compared to Apple, Microsoft. But we need to remind ourselves that Google is not an application software company and comparing it to pure play application software and product firms such as Apple and Microsoft might be doing it some injustice. When compared to its search engine competitor Yahoo, Google financial KPI’s look a lot healthier with higher ROE, ROA and net profit margin. In addition to comparison other technology service providers, when compared with more niche playes such as search engines Data from IBIS-World We think that with internet access speeds continuing to increase, newer services such as video on demand will be the hot new growth area in the sector. This will enable browsing for most consumers to become instantaneous, whereas previously, some pages may have taken longer to load. Major players will have the capacity to provide an increasing array and broader depth of services to consumers, many of which are likely to be subsidized by advertisements. The volume of paid clicks will continue to be driven by more users on the internet, more services on the internet and more advertisements on the internet. This will spur further growth during the outlook period. The single most important growth area for the industry will continue to be the internet, accounting for almost 10% of the $150 billion advertising industry. Despite the recessionary economic weather, the search industry will be somewhat insulated with most enterprises moving to the cheaper option of online advertising. Companies such as Yahoo, Google and AOL are ideally positioned to take advantage of this paradigm shift in the advertising industry. Data from Google – S&P Report Here is it is also important that we mention the recent failed merger attempts of Yahoo and Microsoft. To accelerate Microsoft’s advertising strategy, during fiscal As compared to its peers, Google has one of the highest valuations. Google’s market cap is second only to Microsoft year 2008, it submitted a proposal to the Yahoo! Inc. board of and Microsoft isn’t even a pure play search engine provider. directors to acquire all of the outstanding shares of Yahoo! When compared to Yahoo, the most similar company vis-à-vis For $31 per share in a cash and stock deal valued at $44.6 its business model, Google has far better financial KPI’s. Billion. But the price demanded by Yahoo! was not agreed upon by Microsoft. Subsequently, proposals to purchase ($33 per share) Yahoo!’s search business and make an investment in Yahoo!, all of which were rejected by Yahoo Inc. MARKETS AND COMPETITION 6 Henry Fund Research In case of the deal going through Google’s bastion of online advertising would have been severely challenged by the combined might of Yahoo-Microsoft. Despite the failure of the talks, with a recent change in the senior leadership at Yahoo Inc! and a rumors of renewal in talks between Microsoft and Yahoo Inc!, the threat continues to persist. We think that given Google’s venture into the world of product development with distributed cloud computing based browsers such as Chrome and mobile devices operating systems such as Android and its diverse set of online application offerings, Google is best placed to ride out the recessionary climate and emerge stronger as compared to its competition. Inflation THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Increased inflation eats into the income of households, decreasing the consumer spending as well. This directly hurts the industries such as housing, automobiles, retail and percolates down to industries such as healthcare and financial services, leading to decreased cash flows. This inturn leads to budgetary cuts where the IT spending often faces the wrath of management of these organizations. Thus inflation and in-turn consumer spending is very important to the health of the e-business industry.The below attached graph depicts the short-term inflation rates forecast in the US ECONOMIC OUTLOOK The major economic factors affecting the application software industry are as follows: Real GDP Growth Real GDP growth signifies a healthy economy. It measures the wealth of a society by indicating the growth of profits and the expected return in capital. The below graph illustrates the short-term GDP forecast for real GDP growth ratei the United States. Data from Forecasts.org11 Google’s business model depends a lot on consumer and enterprise spending patterns. We believe that consumers will continue to visit Google Web sites and but the click on ad sales will reduce considerably thus reducing the value-add for advertisers. Because of this destruction in value addition, advertisers will reduce their bid prices, resulting in lower revenue for Google. Consumer Spending One of the distinct indicators of the health of an economy is the average spending of the population. As the charts show below, US’s recent recessionary weather is distinctly visible with the dip in retail sales and average consumer spending. Data from Forecasts.org The real GDP for 2008 for the US was 1.8%, down from 2.0% in 2007. It is forecasted to further slow down to 0.9% in 2009. The downward slope clearly suggests a recessionary environment which indicates lower IT spending and a bearish investor perception of application software companies. Google’s revenue depends on businesses spending on advertising products and services on the Internet. We believe that a continuing slowdown in the economy will reduce advertising/marketing budgets of corporations thus having an adverse impact on Google’s revenue stream. But there lies an opportunity in this economic weather as well. With increased emphasis on cost cutting we believe that Google might be benefitted by enterprises willing to forego traditional channels The decrease in spending indirectly also affects the of advertising for new age e-advertising strategies thus advertising spend for products hence affecting advertising benefitting Google. channels being serviced by firms such as Google. But as is being indicated by the charts, a stabilizing of the eroding 7 Henry Fund Research sales figures indicates a recent increase in consumer confidence, auguring well fro Google in 2009-2010. Foreign Exchange Currency Rates THE UNIVERSITY OF IOWA Henry B. Tippie School of Management T-Mobile, a nationwide wireless carrier was the first to power its hand-held mobile phones with Android, after which Android is also slated to appear on gadgets such as set-top boxes and MP3 players. Google’s entry into the mobile Os market has certainly heated up the race to the top with other players such as Apple, Microsoft, RIM and Symbian. But we believe Google has an advantage because of its superior algorithms and also its ability to seamlessly integrate its other internet offerings with the hand-held device. But Google’s march into the OS market has not stopped. According to recent news, pc maker Hewlett-Packard (HPQ)9 is "studying" Google's (GOOG) Android operating system to determine whether the software might work well on HP's own computers The company is evaluating Android's computing and communications functions, but we are not certain whether HP would ship Android-powered products. We think that there is a possibility that HP would load Android on the popular miniature laptops known as netbooks. Today the little machines mostly run Microsoft's (MSFT) Windows XP or the open-source Linux operating system. In case the HP-netbooks are fitted with Android, this would mean Google’s entry into the PC Os business directly competing against entrenched players such as Microsoft and Apple. We believe this is a huge growth opportunity for Google and even if the HP partnership doesn’t work out, there could be a possibility of similar deals with firms such as Dell or Lenovo. In the recent past, the US dollar has strengthened significantly with respect to the global currencies. Below are highlighted the exchange rates of the Euro and the Yen against the US Dollar. The other growth area that Google will probably try to penetrate more aggressively would be the health care sector Data from X-Rates.com with its Google Health Platform. Recent tie-ups with CVS and As is shown in the charts attached, the strengthening of the IBM suggests that the senior leadership at Google has dollar has hurt the interests of most of the global application recognized this sector as a high growth sector in the US with software developers and providers. We believe that the the ageing baby boomer population, recent governmental current USD rates against most global currencies will remain policies suggesting increased spending in the health care stable because of the economic downturn being faced by domain and the push towards lean processes and automation almost all regions of the world. This foreign exchange in the industry. movement will hurt Google because its international revenues have grown as a percentage of its total revenues to 51% in Google is also innovating with products such as Google Voice which will be available initially to existing users of 2008 from 48% in 2007. The increase in the proportion of international revenues GrandCentral, a service Google acquired in July of 2007. The derived from international markets increases Google’s new application improves the way you use a user’s phone. exposure to fluctuations in foreign currency to U.S. dollar The can get transcripts of his/her voicemail and archive and exchange rates. Though Google has a foreign exchange search all of the SMS text messages he/she sends and hedging program that is designed to reduce its exposure to receives. one can also use the service to make low-priced fluctuations in foreign currencies, we believe that this program international calls and easily access Google directory service. will not fully offset the effect of fluctuations on its revenues Product innovations such as these gives Google the edge over its competitors especially in the mobile OS market with and earnings. the possibility of horizontal and vertical integration of such applications in Android hence enhancing the end-users experience. CATALYSTS FOR GROWTH 8 Google’s catalyst for growth will be from sectors such as In addition to these sectors Google is also reaching out to internet advertising and entertainment, health care and governmental administrative service areas. A prime example of this would be its application Election Centers10 using government. which citizens confirm their voter registration status, find their As has been states earlier, Google’s mobile operating system polling location, view their constituency on a map and access Android is seen as a vehicle of growth in the next couple of election news. Voters can also get in-depth data about the years. Since Android is open-source, anyone is free to use it area where they vote, including changes in literacy, poverty, and modify it. We think this open platform will spur greater and employment rates in the constituency since the last innovation. Furthermore, Android allows for easy creation of election. Voters can learn about the background of their applications which can be deployed on any Android device. Member of Parliament and this year’s candidates, and are To date, more than 1,000 apps have been uploaded to the able to see politician’s voting records, and attendance. Android Market including Shop Savvy (which reads bar codes and then compares prices). 8 Henry Fund Research Yahoo developed a similar site for Indian citizens last week, but Yahoo’s site doesn’t seem to be as comprehensive as Google India’s election site. Google has launched the Google India Elections Center to help engage India’s 700 million eligible voters in the country’s 15th general election, set to take place over the course of the this month. Google launched similar web based election centers in the U.S. and Australia in the past. Application and product innovation such as these and the continuing product developments at Google Labs will drive Google through the next couple of years and continue to make it a competitive force against companies such as Microsoft and Apple. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management ex-Google employee, which is being touted as the “Google-Killer”. The strengthening dollar rate is a threat for Google with its diversified business with respect to geographic locations and its increasing dependence on international markets. We also believe that the new Obama administrations move to contemplate new tax regulations for companies outsourcing their services will affect Google, as much as it will the rest of the IT industry in the US. VALUATION Our DCF-EP valuation model is based on the assumption that Google will continue to perform at par with expectations with a expected revenue growth at 25% CAGR. Until 2010 and then we expect it to grow at 15% CAGR. We also assumed that Google will continue to dominate the online search market in the fiscal years 2009 and 2010. We assume the marginal tax rate to be 35% and the normal cash levels at the firm to be 10% of the revenue for a year. The market risk premium is assumed to be 5% fro the valuation model. From fiscal year 2011, we assumed modest revenue growth because we anticipate competition in the online ad markets. Using a weighted average cost of capital of 10.15% and a continuing value growth rate of 2.0%, we arrived at a target price of $393.04 for the share. The relative P/E valuation model forecasts a price of 387.22 whereas the relative PEG model predicts a price of 428.53. We believe that despite the recessionary economic climate and the decrease in ad spending by enterprises in addition to the risks of new competition and other macroeconomic risky parameters, Google continues to be a strong business driven by innovation and strong engineering. We have Google in the portfolio and my recommendation would be a HOLD. INVESTMENT POSITIVES Currently Google is trading at $358 down from its high of $594 in May, 2008. Despite the bear run against the stock which reflects the recessionary environment of the economy as a whole, we believe that the company has enough long-term benefits in the form of higher returns on investments for advertiser, satisfied customers, higher market shares, and higher costs-per-click to sustain its growth story through 2009-2010. Google’s diverse product offerings, starting from its mobile OS to enterprise software products such as Chrome and its ever fertile Google Labs suggests that the core innovative principles continue to prosper hence we believe that Google is better placed to ride out the recession as compared to its Competitors. The recent failed take-over of Yahoo by Microsoft is another shot in the arm for Google. We think that this ensures Google’s position in the ad revenues industry in the US will persist as the industry leader. INVESTMENT NEGATIVES The most important investment negative would be threat from new innovations and products in the search engine industry. Google's success has been driven by the simplicity and effectiveness of its search engine, which indexes searches by relevance for users in a very short space of time. Google's search engine is the world's most popular search engine and the term "to Google", meaning to search using the internet, has become part of the vernacular. A challenge that any technology company, particularly Google faces is the low entry barriers in the industry and the ability of an entrepreneur charting a similar path such as Google and developing a search engine which is smarter than the current offerings in the market. This threat is ever-lasting and will only be negated by Google’s ability to diversify in the technology sector and investing in product development. A prime example of this event would be new search engine Cuil, developed by an REFERENCES The references section is more than just a list of sources used to create the report. We suggest using numbered endnotes for each citation. These numbers can then be referenced throughout the text where appropriate. 1 - Brand Republic – Future Google: Know your Frenemy (Gareth Jones – 17th October 2008) http://live.revolutionmagazine.com/news/features/890263/ 2 – IBIS Industry Report – Search Engines in the US. 3 – Google Annual Report (2008) 4 – paidContent.org – Google, Microsoft announce health parteners (Joseph Tartakoff – 6th April 2009) http://www.paidcontent.org/entry/419-microsoft-integrates-itstwo-digital-health-record-platforms/ 5 – comScore.com – Measuring the Digital World 9 Henry Fund Research 6 – Reuters – Key Developments for Google http://www.reuters.com/finance/stocks/keyDevelopments?symb ol=GOOG.O×tamp=20090405000000&rpc=66 7 – S&P Stock Report – Google 8 – X-rates.com - www.x-rates.com 9 – Business Week – “HP is studying Android for PC use (Aaron Ricadela – 1st April 2009) http://www.businessweek.com/technology/content/mar2009/tc20 090331_280536.htm?chan=technology_technology+index+page_ top+stories 10 – Tech Crunch – “Google Helps Rock the Vote in India” (Leena Rao – 6th April 2009) http://www.techcrunch.com/2009/04/06/google-helps-rock-thevote-in-india/ 11 - http://forecasts.org/ 12 - http://printinthemix.rit.edu/fastfacts/show/168 13- Tech Crunch – “IAB Reports Internet Advertising Grew 10 Percent Last Year; Outpacing TV” (Erick Schonfeld – 20th March 2009) http://www.techcrunch.com/2009/03/30/iab-reportsinternet-advertising-grew-10-percent-last-year-outpacing-tv/ THE UNIVERSITY OF IOWA Henry B. Tippie School of Management IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. 10 Marginal Tax Rate CV Growth Rate Inflation Rate Risk Free Rate Market Risk Premium Last Closed Stock Price 35.00% 2% 3.0% 3.5% 5.0% 388.74 www.inflationdata.com 30 year T-Bonds Henry Fund MRP Updateable Stock Quotes from MSN Money 30 35 50 Income Statement Revenue Growth Rate Google Websites Google Network websites Licensing & other revenues Google Websites Google Network websites Advertising revenues Licensing & other revenues Revenues Revenue growth rate Cost of revenues Research & development expense Sales & marketing expense General & administrative expense Total costs & expenses Income from operations Impairment of equity investments Interest income Realized gains on marketable securities, net Interest expense Other income (expense) Interest income (expense) & other, net Income before income taxes Provision for income taxes Net income Net Income Growth Rate Year end shares outstanding EPS EPS Growth Rate 2006 88% 55% 53% 6,332,800 4,159,800 10,492,600 112,289 10,604,889 73% 4,225,027 1,228,589 849,518 751,787 7,054,921 3,549,996 0 412,063 0 -257 49,238 461,044 4,011,040 933,594 3,077,446 2007 68% 39% 61% 10,624,700 5,787,900 16,412,600 181,343 16,593,943 56% 6,649,085 2,119,985 1,461,266 1,279,250 11,509,586 5,084,400 0 559,205 0 -1,203 31,578 589,580 5,673,980 1,470,260 4,203,720 36.60% 312,917 13.43 34.89% 1.27% 2008 36% 16% 268% 14,413,800 6,714,700 21,128,500 667,036 21,795,536 31% 8,621,506 2,793,192 1,946,244 1,802,639 15,163,581 6,631,969 1,094,757 389,533 94,205 0 4,523 316,384 5,853,596 1,626,738 4,226,858 0.55% 315,140 13.41 -0.16% 0.71% 2009E 30% 30% 50% 18,737,940 8,729,110 27,467,050 1,000,554 28,467,604 31% 11,336,370 3,648,246 2,542,030 937,595 18,464,241 8,662,153 1,094,757 508,777 123,043 0 5,908 413,236 7,980,632 2,047,786 5,932,846 40.36% 319,138 18.59 38.60% 2010E 30% 30% 45% 24,359,322 11,347,843 35,707,165 1,450,803 37,157,968 31% 14,797,048 4,761,954 3,318,041 1,223,816 24,100,859 11,306,466 1,094,757 664,093 160,605 0 7,711 539,385 10,751,094 2,758,671 7,992,423 34.71% 323,186 24.73 33.03% 2011E 20% 20% 40% 29,231,186 13,617,412 42,848,598 2,031,125 44,879,723 21% 17,872,005 5,751,530 4,007,559 1,478,136 29,109,230 13,656,050 1,094,757 802,097 193,980 0 9,313 651,474 13,212,767 3,390,323 9,822,444 22.90% 327,286 30.01 21.36% 2012E 15% 15% 35% 33,615,864 15,660,023 49,275,888 2,742,018 52,017,906 16% 20,714,573 6,666,319 4,644,967 1,713,236 33,739,094 15,828,064 1,094,757 929,672 224,833 0 10,795 755,092 15,488,399 3,974,237 11,514,162 17.22% 331,437 34.74 15.75% 2013E 10% 10% 30% 36,977,451 17,226,026 54,203,476 3,564,624 57,768,100 11% 23,004,415 7,403,231 5,158,433 1,902,622 37,468,701 17,577,739 1,094,757 1,032,440 249,686 0 11,988 838,562 17,321,544 4,444,612 12,876,932 11.84% 335,641 38.37 10.43% 308,997 9.96 110% Common Size IS Revenue Google Websites Google Network websites Licensing & other revenues Revenue growth rate Cost of revenues Forecasted Percentage(Average) Research & development expense Sales & marketing expense General & administrative expense Income from operations Interest income (expense) & other, net Provision for income taxes Provision for income taxes(Average) 2006 88.00% 55.00% 53.00% 73.00% 39.84% 39.82% 11.59% 8.01% 7.09% 33.48% 4.35% 23.28% 25.66% 2007 67.77% 39.14% 61.50% 56.47% 40.07% 12.78% 8.81% 7.71% 30.64% 3.55% 25.91% 2008 35.66% 16.01% 267.83% 31.35% 39.56% 12.82% 8.93% 8.27% 30.43% 1.45% 27.79% 2009E 30.00% 30.00% 50.00% 30.61% 39.82% 12.82% 8.93% 8.27% 30.43% 1.45% 25.66% 2010E 30.00% 30.00% 45.00% 30.53% 39.82% 12.82% 8.93% 8.27% 30.43% 1.45% 25.66% 2011E 20.00% 20.00% 40.00% 20.78% 39.82% 12.82% 8.93% 8.27% 30.43% 1.45% 25.66% 2012E 15.00% 15.00% 35.00% 15.91% 39.82% 12.82% 8.93% 8.27% 30.43% 1.45% 25.66% 2013E 10.00% 10.00% 30.00% 11.05% 39.82% 12.82% 8.93% 8.27% 30.43% 1.45% 25.66% Balance Sheet Cash & cash equivalents Marketable securities Accounts receivable, net Deferred income taxes, net Income taxes receivable, net Prepaid revenue share, expenses & other assets Total current assets Prepaid revenue share, expenses & other assets, non-current Deferred income taxes, net, non-current Non-marketable equity securities Property & equipment, net Intangible assets, net Goodwill TOTAL ASSETS Accounts payable Accrued compensation & benefits Accrued expenses & other current liabilities Accrued revenue share Deferred revenue Income taxes payable, net Total current liabilities Deferred revenue, long-term Income taxes payable, net, non-current Deferred income taxes, net, non-current Other long-term liabilities Common Stock Accumulated other comprehensive income Retained earnings Total stockholders' equity TOTAL LIABILITIES + EQUITY 2006 3,544,671 7,699,243 1,322,340 29,713 443,880 13,039,847 114,455 1,031,850 2,395,239 346,841 1,545,119 18,473,351 211,169 351,671 265,872 370,364 105,136 375 1,304,587 20,006 40,421 68,497 11,883,215 23,311 5,133,314 17,039,840 18,473,351 2007 6,081,593 8,137,020 2,162,521 68,538 145,253 694,213 17,289,138 168,530 33,219 1,059,694 4,039,261 446,596 2,299,368 25,335,806 282,106 588,390 465,032 522,001 178,073 2,035,602 30,249 478,372 101,904 13,241,534 113,373 9,334,772 22,689,679 25,335,806 2008 8,656,672 7,189,099 2,642,192 286,105 1,404,114 20,178,182 433,846 85,160 5,233,843 996,690 4,839,854 31,767,575 178,004 811,643 480,263 532,547 218,084 81,549 2,302,090 29,818 890,115 12,515 294,175 14,450,653 226,579 13,561,630 28,238,862 31,767,575 2009E 8,021,259 7,730,767 2,734,119 151,673 1,088,922 19,726,740 263,193 85,160 7,056,100 996,690 4,839,854 34,161,125 168,738 769,394 455,264 504,826 206,732 77,304 2,182,258 29,818 2,343,254 7,271 15,773,213 247,316 14,802,825 30,823,354 34,161,125 32,707,986 2010E 9,597,432 9,249,858 3,271,371 181,477 1,302,895 23,603,032 314,910 85,160 9,925,229 996,690 4,839,854 40,873,765 191,386 872,660 516,368 572,582 234,479 87,680 2,611,070 29,818 4,104,008 111,783 18,872,640 269,951 19,332,578 36,880,124 40,873,765 37,659,872 2011E 11,591,863 11,172,060 3,951,191 219,189 1,573,648 28,507,951 380,351 85,160 12,474,571 996,690 4,839,854 49,367,695 262,183 1,195,472 707,381 784,391 321,217 120,114 3,153,673 29,818 4,883,800 191,909 22,794,541 294,658 30,495,317 44,544,140 49,367,695 45,374,009 2012E 12,214,150 11,771,811 4,163,303 230,956 1,658,126 30,038,346 400,770 85,160 14,831,247 996,690 4,839,854 52,017,906 378,450 1,725,615 1,021,076 1,132,236 463,663 173,379 3,322,972 29,818 5,085,541 235,979 24,018,223 321,625 50,685,830 46,935,408 52,017,906 47,822,480 2013E 13,564,334 13,073,097 4,623,526 256,487 1,841,420 33,358,863 445,072 85,160 16,729,678 996,690 4,839,854 57,768,100 606,664 2,766,200 1,636,808 1,814,999 743,263 277,931 3,690,302 29,818 5,592,952 282,251 26,673,260 351,061 93,556,762 52,123,769 57,768,100 53,065,263 Common Sized Balance Sheet Revenue Net Income Before Taxes Cash & cash equivalents Marketable securities Accounts receivable, net Deferred income taxes, net Income taxes receivable, net Prepaid revenue share, expenses & other assets Total current assets Prepaid revenue share, expenses & other assets, non-current Total property & equipment Less accumulated depreciation & amortization Total Assets Accounts payable Accrued compensation & benefits Accrued expenses & other current liabilities Accrued revenue share Deferred revenue Income taxes payable, net Total current liabilities Deferred revenue, long-term Total stockholders' equity 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 10,604,889 16,593,943 21,795,536 28,467,604 37,157,968 44,879,723 52,017,906 57,768,100 4,011,040 5,673,980 5,853,596 7,980,632 10,751,094 13,212,767 15,488,399 17,321,544 19.19% 24.00% 27.25% 23.48% 23.48% 23.48% 23.48% 23.48% 41.68% 32.12% 22.63% 22.63% 22.63% 22.63% 22.63% 22.63% 7.16% 8.54% 8.32% 8.00% 8.00% 8.00% 8.00% 8.00% 0.16% 0.27% 0.90% 0.44% 0.44% 0.44% 0.44% 0.44% 0.00% 0.84% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.40% 2.74% 4.42% 3.19% 3.19% 3.19% 3.19% 3.19% 122.96% 104.19% 92.58% 69.30% 63.52% 63.52% 57.75% 57.75% 0.88% 0.97% 2.15% 1.33% 1.33% 1.33% 1.33% 1.33% 31.02% 33.26% 34.76% 33.02% 33.02% 33.02% 33.02% 33.02% 27.19% 26.82% 30.92% 28.31% 28.31% 28.31% 28.31% 28.31% 174.20% 152.68% 145.75% 120.00% 110.00% 110.00% 100.00% 100.00% 16.19% 13.86% 7.73% 7.73% 7.33% 8.31% 11.39% 16.44% 26.96% 28.90% 35.26% 35.26% 33.42% 37.91% 51.93% 74.96% 20.38% 22.84% 20.86% 20.86% 19.78% 22.43% 30.73% 44.35% 28.39% 25.64% 23.13% 23.13% 21.93% 24.87% 34.07% 49.18% 8.06% 8.75% 9.47% 9.47% 8.98% 10.19% 13.95% 20.14% 0.03% 0.00% 3.54% 3.54% 3.36% 3.81% 5.22% 7.53% 10.00% 11.77% 11.41% 11.06% 11.06% 11.06% 11.06% 11.06% 0.19% 0.18% 0.14% 0.17% 0.17% 0.17% 0.17% 0.17% 92.24% 89.56% 88.89% 90.23% 90.23% 90.23% 90.23% 90.23% Cash Flow Statement Net income Depreciation & amortization of property & equipment In-process research & development Amortization of intangibles & other Stock-based compensation Excess tax benefits from stock-based award activity Deferred income taxes Impairment of equity investments Other net income adjustments Accounts receivable Income taxes, net Prepaid revenue share, expenses & other assets Accounts payable Accrued expenses & other liabilities Accrued revenue share Deferred revenue Net cash flows from operating activities Purchases of property & equipment Purchase of marketable securities Maturities & sales of marketable securities Investments in non-marketable securities Net cash flows from investing activities Excess tax benefits from stock-based award activity Net proceeds from public offerings Net cash flows from financing activities 2006 3,077,446 494,430 10,800 77,509 458,100 -581,732 0 0 1,674 -624,012 398,414 -289,157 95,402 291,533 139,300 30,801 3,580,508 -1,902,798 -26,681,891 23,107,132 -1,019,147 -6,899,150 581,732 2,063,549 2,966,398 19,741 -332,503 3,877,174 3,544,671 2007 4,203,720 807,743 0 159,915 868,646 -379,206 -164,212 0 -39,741 -837,247 744,802 -298,689 70,135 418,905 150,310 70,329 5,775,410 61.3% -2,402,840 -15,997,060 15,659,473 -34,511 -3,681,589 379,206 0 403,067 40,034 2,536,922 3,544,671 6,081,593 2008 4,226,858 1,212,237 0 287,650 1,119,766 -159,088 -224,645 1,094,757 -31,910 -334,464 626,027 -147,132 -211,539 338,907 14,000 41,433 7,852,857 36.0% -2,358,461 -15,356,304 15,762,796 -47,154 -5,319,422 159,088 0 87,567 -45,923 2,575,079 6,081,593 8,656,672 2009E 5,932,846 1,454,684 0 345,180 1,343,719 -190,906 -269,574 1,313,708 -38,292 -401,357 751,232 -176,558 -253,847 406,688 16,800 49,720 9,423,428 20.0% -4,461,640 -29,050,426 29,819,411 -89,204 -10,063,064 91,103 0 50,146 1 -45,923 -635,413 8,656,672 8,021,259 2010E 7,992,423 2,373,531 0 563,212 2,192,475 -311,490 -439,850 2,143,508 -62,479 -654,872 1,225,746 -288,081 -414,188 663,572 27,412 81,125 12,813,088 36.0% -5,003,970 -32,581,620 33,444,078 -100,047 -11,286,270 99,125 0 95,277 -45,923 1,576,173 8,021,259 9,597,432 2011E 9,822,444 5,265,818 0 1,249,519 4,864,135 -691,060 -975,832 4,755,499 -138,613 -1,452,873 2,719,389 -639,125 -918,901 1,472,173 60,814 179,980 17,422,027 36.0% -6,900,002 -44,926,976 46,116,224 -137,956 -15,562,699 204,921 0 181,027 -45,923 1,994,431 9,597,432 11,591,863 2012E 11,514,162 15,884,799 0 3,769,282 14,673,086 -2,084,643 -2,943,682 14,345,376 -418,139 -4,382,718 8,203,275 -1,927,975 -2,771,945 4,440,938 183,452 542,926 23,688,826 36.0% -10,359,099 -67,449,697 69,235,137 -207,115 -23,364,567 804,901 0 343,951 -45,923 622,287 11,591,863 12,214,150 2013E 12,876,932 65,154,205 0 15,460,349 60,184,158 -8,550,516 -12,074,014 58,839,998 -1,715,069 -17,976,465 33,647,126 -7,907,916 -11,369,605 18,215,263 752,459 2,226,903 32,209,828 36.0% -13,951,560 -90,840,760 93,245,378 -278,941 -31,467,229 6,006,930 0 653,508 -45,923 1,350,184 12,214,150 13,564,334 Effect of exchange rate changes on cash & cash equivalents Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year NOPLAT Less Add Add Add Invested Capital Plus Plus Plus Plus Plus Less Less Less Less Less Less 2006 2007 2008 2009E 2010E 2011E Revenue 10604889 16593943 21795536 28467604 37157968 44879723 Total Costs and Expenses 7054921 11509586 15163581 18464241 24100859 29109230 Interest Income/Expenses and Other Losses and Gain(Net) 461044 589580 (778373) (681521) (555372) (443283) Adjusted EBITA 4,011,012 5,673,937 5,853,582 9,321,841 12,501,738 15,327,210 Marginal Tax Rate 35% 35% 35% 35% 35% 35% Total Income Tax Provision 933,594 1,470,260 1,626,738 2,047,786 2,758,671 3,390,323 Tax Shield on Interest Expense 0 0 0 0 0 0 Taxes on EBITA 1403854.2 1985877.95 2048753.7 3262644.445 4375608.213 5364523.348 Changes in Deferred Taxes 0 -40421 12515 -12515 0 0 NOPLAT 2,607,158 3,647,638 3,817,343 6,046,682 8,126,130 9,962,686 1060488.9 1322340 0 114455 346841 211169 351671 265872 370364 105136 375 1539537.9 2395239 68497 90500 3956779.9 2,607,158 2316000 112.6% 2,607,158 2879000 -271,842 2316000 112.6% 10.15% 2372083.8 3544671 1060488.9 2484182.1 7699243 1031850 11215275.1 1659394.3 2162521 145253 168530 446596 282106 588390 465032 522001 178073 0 2546692.3 4039261 101904 172200 6656249.3 3,647,638 3956779.9 92.2% 3,647,638 2699469.4 948,169 2179553.6 2642192 0 433846 996690 178004 811643 480263 532547 218084 81549 3950191.6 5233843 294175 257900 9147759.6 3,817,343 6656249.3 57.3% 2846760.4 2734118.592 0 263192.9336 996690 168738.2359 769393.9909 455263.5411 504825.9662 206731.9242 77304.07404 4658504.193 7056099.863 7271 275429 11982762.06 3715796.83 3271371.239 0 314910.1856 996690 191385.808 872659.8917 516367.735 572582.2897 234478.9024 87679.60976 5823614.018 9925229.255 111783 274003 15911063.27 4487972.262 3951191.104 0 380351.3063 996690 262182.7775 1195472.102 707381.2233 784390.5283 321216.7639 120113.8363 6425447.441 12474571.44 191909 255868 18963977.88 2012E 52017906 33739094 (339665) 17,939,147 35% 3,974,237 0 6278701.295 0 11,660,445 5201790.594 4163303.304 0 400769.7447 996690 378450.0837 1725614.937 1021075.777 1132235.549 463663.2214 173379.3953 5868134.679 14831247.27 235979 236551 20699953.95 11,660,445 18963977.88 61.5% 11,660,445 1735976.074 9,924,469 18963977.88 61.5% 10.15% 9735601.509 12214150.01 5201790.594 7012359.416 11771810.58 85160 18869330 2013E 57768100 37468701 (256195) 20,043,204 35% 4,444,612 0 7015121.269 0 13,028,082 5776810.018 4623525.649 0 445071.8717 996690 606664.0659 2766199.874 1636807.624 1814999.26 743262.6578 277931.1021 3996232.955 16729677.62 282251 211430 20655089.57 13,028,082 20699953.95 62.9% 13,028,082 -44864.37766 13,072,947 20699953.95 62.9% 10.15% 10927037.03 13564333.83 5776810.018 7787523.814 13073097.06 85160 20945780.87 Normal Cash (10% of Sales) Receivables Income Tax Receivables Pre-paid Revenue Share Intangible Assets(net) Accounts Payable Accrued Compensation & Benefits Accrued Expenses & other current liabilities Accrued Revenue Share Deferred Revenue Income Tax Payable Net Operating Working Capital Net Property Plant and Equipment Less Other long-term liabilities Add Operating Lease Net Invested Capital ROIC(Return on Invested Capital) NOPLAT Invested Capital Beginning ROIC (NOPLAT/Invested Capital) Free Cash Flows NOPLAT Change in Invested Capital Free Cash Flows (NOPLAT - Change in IC) Economic Profit Invested Capital Beginning ROIC WACC EP (ICB*(ROIC-WACC)) Non-Operating Asset Cash & Cash Equivalents Less Normal Cash Excess Cash Short Term Investments Long Term Investment Non-Operating Assets 6,046,682 8,126,130 9,962,686 9147759.6 11982762.06 15911063.27 66.1% 67.8% 62.6% 3,817,343 6,046,682 8,126,130 9,962,686 2491510.3 2835002.457 3928301.216 3052914.603 1,325,833 3,211,679 4,197,828 6,909,772 3956779.9 6656249.3 9147759.6 11982762.06 15911063.27 92.2% 57.3% 66.1% 67.8% 62.6% 10.15% 10.15% 10.15% 10.15% 10.15% 3246024.89 3141733.996 5118184.227 6909879.19 8347713.295 6081593 1659394.3 4422198.7 8137020 1059694 13618912.7 8656672 2179553.6 6477118.4 7189099 85160 13751377.4 8021259.128 2846760.4 5174498.728 7730766.612 85160 12990425.34 9597431.688 3715796.83 5881634.858 9249857.568 85160 15216652.43 11591862.84 4487972.262 7103890.58 11172059.75 85160 18361110.33 WACC: Common Shares Outstanding Current Price Market Value of Equity Value of Capital (E) Risk Free Rate Market Premium 315140 $348.06 109687796.9 109687797 3.50% 5.00% 100.0% Bloomberg (10 Year treasury) 1928-2008 Geometric Average Return Beta Cost of Equity 1.33 10.15% Google Finance WACC 10.15% WACC MRP CV Growth Rate 10.15% CV ROIC 5.00% Cost of Equity 2% 1 2009E 3,211,679 2,915,733 113,302,554 13,751,377.40 257,900.00 1,360,964.63 125,435,067 319,138 393.04 1 2009E 3,211,679 2,915,733 104,154,794 9,147,760 113,302,554 13,751,377 257,900 1,360,965 125,435,067 319,138 393.04 2 2010E 4,197,828 3,459,837 62.94% 10.15% DCF Model FCF PV(FCF) NPV(FCF) Plus: Non-Operating Asset Less: PV(Leases) Less: ESOP PV(Equity) Shares Outstanding Price 3 2011E 6,909,772 5,170,234 4 2012E 9,924,469 6,741,698 5 2103E 13,072,947 8,062,152 5 CV 155,307,018 86,952,900 EP Model EP PV(EP) NPV(EP) Invested Capital PV(Operations) Add(Non-Operating Assets) Less: PV(Debt) Less: ESOP PV(Equity) Shares Outstanding Price 2 2010E 4,197,828 3,459,837 3 2011E 6,909,772 5,170,234 4 2012E 9,924,469 6,741,698 5 2013E 13,072,947 8,062,152 5 CV 107,655,537 76,752,162 VALUATION OF OPTIONS GRANTED IN ESOP Ticker Symbol Current Stock Price Risk Free Rate Current Dividend Yield Annualized St. Dev. of Stock Returns GOOG 388.74 3.50% 0.00% 35.00% Range of Outstanding Options Range 1 Range 2 Range 3 Range 4 Range 5 Range 6 Range 7 Range 8 Total Number of Shares 1,340,732 1,576,111 1,370,309 1,759,907 1,656,645 6,016,466 200,564 50,704 13,971,438 $ Average Exercise Price $19.69 $176.66 $274.70 $329.97 $450.82 $545.51 $655.23 $718.20 Average Remaining Life (yrs) B-S Option Price 155.79 $ $ $ $ $ $ $ $ 3.22 $ 4.8 4.2 5.2 5.8 7.5 8.7 8.9 8.8 372.09 227.86 145.36 107.50 45.78 8.10 (35.32) (57.40) 245.12 $ $ $ $ $ $ $ $ $ Value of Options Granted 498,877,967 359,126,128 199,189,247 189,183,148 75,840,469 48,741,555 (7,083,363) (2,910,519) 1,360,964,632 Ticker YHOO BIDU MSFT ORCL AAPL RIMM GOOG PEG 09 PE 09 Company Yahoo! Inc Baidu, Inc Microsoft Corporation Oracle Corporation Apple Inc. Research in Motion Ltd. Google Inc. 2009 projected stock price $ 14.91 $ 177.64 $ 23.55 $ 20.22 $ 130.77 $ 69.64 $ $ $ 439.81 428.53 387.22 EPS 09E $ 0.50 $ 8.00 $ 1.90 $ 1.42 $ 7.50 $ 4.86 $ 21.04 P/E 09 29.82 22.21 12.39 14.24 17.44 14.33 18.40 Est 5 yr growth rate 15.53% 34.25% 10.22% 14.29% 17.15% 22.64% 19.01% PEG 09 1.92 0.65 1.21 1.00 1.02 0.63 1.07