Amazon.Com Inc AMZN [XNAS] | QQQQ

Amazon.com Inc AMZN [XNAS] | QQQQ

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

Strong Start to 2013 for Amazon as it Monetizes Market CSOI margins during the second quarter (versus 2.8% posted Share Gains, Fortifies Its Already Wide Moat in the second quarter of 2012), with revenue comfortably within the $14.5-$16.2 billion guidance range (representing 13%-26% growth, or 16%-29% excluding currency). by R.J. Hottovy, CFA Analyst Note Apr. 26, 2013 Director However, as the year progresses, modest CSOI margin gains Analyst covering this company do not Amazon AMZN continued to build a case as one of the most own its stock. could offer a possible upside catalyst. disruptive and diverse players in the consumer universe in the first quarter, while also layering in a steadily improving Pricing as of Apr 29, 2013. Thesis Mar. 04, 2013 Rating as of Apr 29, 2013. margin expansion story. Active users grew 21% to 209 A shakeout among traditional brick-and-mortar retailers is million, total units sold grew 30%, and third party units were under way, particularly in commodified categories. With up 33%, driving revenue growth of 21% (24% excluding minimal customer switching costs and intense competition, Currency amounts expressed with "$" currency). Although these trends represent a nominal are in U.S. dollars (USD) unless we've already seen Circuit City, Linens 'N Things, and deceleration on a sequential basis, they keep Amazon well otherwise denoted. Borders meet their demise in the past few years, while ahead of global e-commerce sales trends, as well as names like Best Buy, Barnes & Noble, Sears, Office Depot, comparable sales trends among most bricks-and-mortar Stock Price and OfficeMax struggle to reverse deteriorating retailers. This implies market share gains, and reinforces our 300 fundamentals. Mass merchants like Wal-Mart and Costco views about Amazon's ability to price below peers through certainly have played a role in this trend, as has the rapid 250 structural cost advantages as well as its strong network growth of key original-equipment manufacturers like Apple. effect. 200 However, we believe the most disruptive force in retail in recent years has been Amazon.com. Amazon's low-cost 150 Gross margin grew 260 basis points, to 26.6%, which we operations, network effect, and laser focus on customer attribute to third-party digital content sales, Amazon Prime 100 service provide the company with sustainable competitive memberships, and Amazon Web Services, each of which is a 50 advantages that traditional retailers cannot match; this building block of our longer-term cash flow forecasts. The 09 10 11 12 13 should yield additional market share in coming years. Armed strong gross margins drove consolidated segment operating with one of the most capital-efficient models in e-commerce, income, or CSOI, of $441 million, well ahead of the high end Amazon generates economic returns well ahead of our cost of guidance ($350 million). The CSOI figure was a modest of capital assumption, supporting our view that it has a wide contraction as a percentage of sales (down 30 basis points to economic moat. 2.7%) due to increased fulfillment, AWS, and content costs (particularly in international markets). However, North Amazon's primary advantage is its low-cost operations. The American CSOI came in at $457 million, or 4.9% of segment cost to maintain its network is much lower than having a revenue, which gives us increased comfort with our five-year large physical retail presence, allowing Amazon to price consolidated CSOI margin target of approximately 6%. below its brick-and-mortar peers while still generating excess economic returns. Additionally, tax laws mandate that We plan to make minor model adjustments based on the online retailers collect sales tax in states where they have a first quarter, but they won't sway our $300-per-share fair physical presence, with the tax responsibility falling to the value estimate. We'd prefer a bit more margin of safety, but end consumers themselves. As a result, Amazon currently still find Amazon to be one of the more intriguing long-term collects sales tax in a handful of states where it maintains a growth stories in our consumer coverage universe. Near-term physical presence, providing additional cost advantages. fundamentals could remain choppy amid further fulfillment center, AWS, and content investments (largely to support Amazon also prides itself on superior customer service, emerging market growth). We project a small contraction in

© 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. ? Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Amazon.com Inc AMZN [XNAS] | QQQQ

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

in 2012) move from physical to digital distribution, Close Competitors Currency (Mil) Market Cap TTM Sales Oper Income Net Income warehouses and an expansive distribution network will not Wal-Mart Stores Inc USD 258,095 469,162 27,801 16,999 provide the same advantages. Nevertheless, we like eBay Inc USD 68,575 14,543 3,035 2,716 Amazon's chances to compete in digital media given its Best Buy Co Inc USD 8,198 50,705 1,085 -1,231 sizable customer base and the symbiotic hardware/software Barnes & Noble, Inc. USD 1,089 6,942 -117 -105 ecosystem of its Kindle products. We continue to the Kindle suite of products as meaningful customer acquisition tools that add multiple layers of upside to our base-case resulting in high-quality service scores. A user-friendly assumptions, including additional Prime memberships, interface, product recommendations, and wish lists help accelerating digital media sales, and a positive halo effect on drive (and retain) website traffic. In fact, the percentage of general merchandise sales. While we aren't expecting traffic to Amazon derived from search has fallen in recent Amazon to supplant Apple's dominance in digital media, we years at a time when other online retailers have become believe it could develop into a formidable player given its more dependent on search. We think this indicates that vast content offerings and ability to sell hardware as a loss Amazon is increasingly becoming the starting point for online leader. purchases, akin to a mall anchor tenant. Not surprisingly, Amazon has grown its active customer base to 200 million Although it's experienced its share of growing pains, we are users as of December, representing five-year compounded also intrigued by the growth potential of Amazon Web annual growth of more than 20%. This compares favorably Services. In particular, Amazon's cloud computing services with eBay's marketplaces, which has an active customer (EC2) eventually could develop into a multibillion-dollar base of more than 112 million users that has grown at a 6% revenue stream as corporations look for ways to reduce CAGR during the same period. technology expenditures. We estimate that AWS generated approximately USD 1.6 billion in revenue during 2012 and Despite its leading position in an industry with secular expect average annual revenue growth of more than 30% tailwinds, Amazon faces a few potential risks. Given state during the next five years. With recent investments for budget deficits and lobbying efforts by brick-and-mortar additional capacity, we also expect AWS to become an retailers, we haven't been surprised that online sales tax increasingly positive margin contributor due to its highly collection has garnered more attention, with lawmakers in leverageable nature. several states introducing legislation encouraging online retailers to collect sales tax. Obviously, implementation of Valuation, Growth and Profitability sales tax collection would narrow Amazon's advantages and Our discounted cash flow-derived fair value estimate is USD make traditional retailers more competitive. Still, even if 300 per share. We do not believe traditional price/earnings more stringent tax collection laws were put in place, we and enterprise value/EBITDA metrics are meaningful in believe Amazon could maintain its value proposition and Amazon's case, given the impact that ongoing technology, attract customers through other means, including changes to content, and infrastructure investments will have on shipping policies or new Amazon Prime membership near-term margins. Still, we believe Amazon warrants a features. Margin expansion would be mildly more premium valuation based on its wide economic moat, challenging to realize under these circumstances, but our meaningful avenues for growth, and margin expansion longer-term outlook for profitable growth would remain potential. intact. Amazon's strong competitive position and compelling value As media products (which contributed 33% of total revenue

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

proposition should lead to additional share gains in 2013, model. putting full-year revenue growth around 23%. Our model assumes high-teen average annual revenue growth for the Risk five-year period ending in 2017, the result of market share Impairment to Amazon's low-price positioning, whether real gains from traditional retailers, the secular shift to online or perceived, could have an adverse impact on fundamentals. retail, proprietary device sales, and international expansion Amazon must maintain its value proposition to drive site (particularly China and other emerging markets). Additionally, traffic while fending off other online merchants, mass we expect new product categories to drive average annual merchants, warehouse clubs, and specialty retailers for revenue growth of almost 20% in the electronics and other market share. Amazon also faces some regulatory risk, as we general merchandise category (nonmedia products) during expect a federal standard for collecting online sales tax to be the next five years. We anticipate slower (yet relatively put in place within the next several years, potentially stable) growth in sales of media products (high-single-digit weakening one of Amazon's key cost advantages. Additional average annual revenue growth) due to the shift to digital risks include a constantly evolving e-commerce landscape, formats (e-books) and Amazon's already sizable market exposure to volatile discretionary spending patterns, and share. expansion into peripheral business lines such as cloud computing, which could distract management or lead to poor We project that gross margins will expand to around 27% in capital-allocation decisions. International growth brings the next five years, compared with 24.8% in 2012. Amazon's unique challenges, as foreign governing bodies are growing clout with suppliers, the higher proportion of constantly amending online commerce laws. third-party units in the sales mix, and Amazon Web Services' increased presence should allow for higher gross margins, Bulls Say but these will be partly offset by a mix shift to lower-margin OAmazon dominates the online retail landscape with 2012 nonmedia categories. We also forecast moderate operating product sales (USD 51.7 billion, excluding service sales) margin expansion through increasing scale advantages that roughly equal the next six closest non-auction (particularly in the fulfillment and G&A expense line items) competitors combined. AmazonSupply should allow the amid accelerating third-party unit sales. We expect GAAP company to better capture a larger portion of the B2B operating margins to remain around 1% in 2013 amid category for industrial and other business customers. continued technology, content, and international OWith more than half of the world's Internet users coming infrastructure investments (2.3% excluding stock-based from developing markets, Amazon has a tremendous compensation and amortization) but to expand to over 5% by global opportunity. Amazon sells directly in nine countries 2017 (in the low 6% range on an adjusted basis) because of outside of the U.S. and Canada (representing 43% of greater scale in the core business, incremental Prime revenue in 2012), and we believe management is memberships, increased subscription-based services, and evaluating other geographies for expansion. International AWS contribution. Despite relatively low margins, we expect e-commerce trends are accelerating, and growth rates returns on invested capital to exceed our 9.5% cost of capital should exceed the U.S. over the next decade. assumption, thanks to Amazon's capital-efficient business OKindle products are intriguing customer acquisition tools

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

that capitalize on the ongoing transition to digital media demand service. (e-books in particular) while also promoting Prime memberships and demonstrating cloud computing Financial Overview capabilities. Financial Health:Amazon's balance sheet is in great shape. OComplementary e-commerce websites (Zappos.com, As of December 2012, the firm had USD 11.4 billion in cash Diapers.com, Soap.com) and LOVEFiLM (an online movie and equivalents on its balance sheet compared with just rental subscription service) diversify Amazon and provide more than USD 3.1 billion in debt principal obligations multiple layers for growth. (largely the result of a USD 3.0 billion unsecured senior notes OAmazon has leveraged its assets in creative ways, such as offering in November 2012). Amazon has manageable capital allowing third-party sellers to sell on Amazon.com and and financial lease requirements and can easily fund its use its fulfillment services, licensing its platform to large growth using free cash flow. We believe Amazon could merchants, and licensing its payment services. Third-party support substantial incremental debt for acquisitions or to sales represented 40% of units sold in 2012. recapitalize its balance sheet.

Bears Say Company Overview OA rapidly changing Internet landscape may be disruptive Profile: Amazon is the world's highest-grossing online to Amazon's business model. The company faces retailer, with USD 61.1 billion in net sales in 2012, or 7% of competition from eBay, Google, Yahoo, Apple, and the USD 900 billion-plus global e-commerce market. Media Walmart.com, which offer competing e-commerce represented 33% of sales in 2012, and electronics and websites, auction marketplaces, online payment services, general merchandise represented 63% of sales. The comparison shopping sites, ad search engines, video remaining 4% was derived from co-branded credit cards, streaming, and independent website hosting. fulfillment operations, and Amazon Web Services. Outside OAn evolving regulatory landscape exposes Amazon to the U.S., Amazon operates sites in Canada, the U.K., uncertainty. Legislation forcing out-of-state retailers to Germany, France, Italy, Spain, Japan, China, and Brazil. collect sales taxes could impair Amazon's low-price International revenue represented 43% of sales in 2012. perception, making online offerings from brick-and-mortar retailers in commodified retail categories more Management: Chairman and CEO Jeff Bezos founded competitive. Amazon.com in 1994. Tom Szkutak became CFO in September OInternational growth brings unique challenges, as foreign 2002 after 20 years at General Electric, most recently as CFO governing bodies are constantly amending online of GE Lighting. We think that Amazon's management team is commerce laws. Additionally, in many instances, Amazon exemplary in terms of corporate stewardship. Not even the will square off with an incumbent local competitor in most senior managers have golden parachutes. Bezos owns several international markets. about 20% of the shares, takes no equity compensation or OBeyond core retailing, many of Amazon's other ventures bonus pay, and collects a paltry salary. Although the board is have not been successful, including the A9 search engine, small, it is elected every year, receives no cash Amazon auctions, and Unbox--Amazon's original video-on- compensation, avoids insider relationships, and hasn't

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

implemented antitakeover provisions. The company also provides a good deal of supplementary financial data in its quarterly releases. Our only complaint is that such disclosures have not increased as the company has expanded into new areas, including digital downloads, the Kindle suite of products, Prime memberships, and AWS.

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

Analyst Notes

Amazon's Margin Expansion Story Comes Into Focus in the next few quarters amid increased price competition with 4Q on Third-Party Sales, AWS, Prime Memberships brick-and-mortar retailers and further fulfillment center, Jan. 30, 2013 technology/Amazon Web Services, and content-related Amazon's AMZN fourth-quarter update provided us with investments, and we expect a modest contraction in greater conviction in the company's ability to monetize its consolidated CSOI margins during the first quarter (versus tremendous growth over a longer horizon through a the 3.0% posted in the first quarter of 2012). That said, we combination of fulfillment center expense leverage, project first-quarter consolidated CSOI of approximately $400 third-party sales, increased Amazon Prime memberships and million, which is ahead of management's guidance range of other subscription-based services, and robust digital content $0-$350 million (though our first-quarter revenue outlook sales stemming from the Kindle Fire ecosystem. For the falls comfortably within the $15.0 billion-$16.5 billion quarter, consolidated segment operating income came in at outlook, which implies 14%-24% growth year over year). Our $678 million (excluding stock-based compensation and updated model assumes high teens average annual revenue amortization of intangibles), or roughly 3.2% of total revenue, growth through 2017 with consolidated CSOI margins driven by a 210-basis-point increase in the North American breaking through 5% over the same period. However, CSOI margin, which rose to 5.0%. The consolidated CSOI normalized CSOI margins remain the key valuation figure is noteworthy because it not only came above the high assumption, and it is possible our assumptions will prove end of management's previous guidance range of a loss of conservative based on several of Amazon's margin-accretive $280 million and a gain of $600 million, but the growth initiatives. Every 1-percentage-point change in our 50-basis-point improvement relative to the year-ago period five-year CSOI margin target would affect our fair value was also the first quarterly increase since the first quarter of estimate by approximately $30-$40 per share. 2010. While we believe it is premature to call fourth-quarter results an inflection point for Amazon's longer-term margin For the quarter, consolidated revenue grew 22% to $21.3 expansion story in light of continued digital media content billion, below our internal and consensus expectations of and international infrastructure investments, we find $22.3 billion and management's previous guidance of $20.3 ourselves more confident in our medium-term operating billion-$22.8 billion. Foreign currency had a mildly negative margin target above 5% as well as our wide economic moat impact on consolidated top-line results (representing a 1% rating. drag during the quarter), but most of the revenue shortfall was the direct result of increased third-party unit sales We plan to make several changes to our model based on the contribution in the revenue mix (which increased to 39% of strong CSOI results in North America and time value of all units sold compared with 36% a year ago). We believe money, which will probably result in about a 20% increase in third-party sales will continue to outpace overall North our $250 fair value estimate. We'd prefer a wider margin of America segment growth trends in 2013, which will have a safety--especially following this morning's share price mildly dilutive impact on reported revenue but also drive gain--but still find this name to be one of the more higher operating profits (the company only records a portion compelling long-term growth stories in our consumer of revenue from the overall sale, but we believe the take rate coverage universe. Fundamentals could remain choppy over on the sale exceeds equivalent first-party sales, especially

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry

249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail

Analyst Notes (continued)

when factoring in Fulfillment by Amazon services). consolidated CSOI margin target of approximately 6%. Fourth-quarter revenue also outpaced broader global e-commerce industry growth trends, which grew at We plan to make minor model adjustments based on the approximately 14% during the quarter according to first quarter, but they won't sway our $300-per-share fair comScore, suggesting further market share gains. value estimate. We'd prefer a bit more margin of safety, but still find Amazon to be one of the more intriguing long-term Strong Start to 2013 for Amazon as it Monetizes Market growth stories in our consumer coverage universe. Near-term Share Gains, Fortifies Its Already Wide Moat Apr. 26, fundamentals could remain choppy amid further fulfillment 2013 center, AWS, and content investments (largely to support Amazon AMZN continued to build a case as one of the most emerging market growth). We project a small contraction in disruptive and diverse players in the consumer universe in CSOI margins during the second quarter (versus 2.8% posted the first quarter, while also layering in a steadily improving in the second quarter of 2012), with revenue comfortably margin expansion story. Active users grew 21% to 209 within the $14.5-$16.2 billion guidance range (representing million, total units sold grew 30%, and third party units were 13%-26% growth, or 16%-29% excluding currency). up 33%, driving revenue growth of 21% (24% excluding However, as the year progresses, modest CSOI margin gains currency). Although these trends represent a nominal could offer a possible upside catalyst. deceleration on a sequential basis, they keep Amazon well ahead of global e-commerce sales trends, as well as comparable sales trends among most bricks-and-mortar retailers. This implies market share gains, and reinforces our views about Amazon's ability to price below peers through structural cost advantages as well as its strong network effect.

Gross margin grew 260 basis points, to 26.6%, which we attribute to third-party digital content sales, Amazon Prime memberships, and Amazon Web Services, each of which is a building block of our longer-term cash flow forecasts. The strong gross margins drove consolidated segment operating income, or CSOI, of $441 million, well ahead of the high end of guidance ($350 million). The CSOI figure was a modest contraction as a percentage of sales (down 30 basis points to 2.7%) due to increased fulfillment, AWS, and content costs (particularly in international markets). However, North American CSOI came in at $457 million, or 4.9% of segment revenue, which gives us increased comfort with our five-year

Amazon.com, Inc., serves consumers through its retail Morningstar Rating Fair Value Fair Value Economic Moat Style Sector websites and focuses on selection, price, and Uncertainty convenience. The Company's products include books, Large Growth music, computers, electronics, home and garden, and QQQ High $300.00 Wide numerous other products. As of 04-24-2013 61.15 57.82 50.00 48.58 101.09 97.43 145.91 185.65 246.71 264.11 284.72 Annual Price High 18.55 33.00 30.60 25.76 36.30 34.68 47.63 105.80 160.59 172.00 250.87 Low Recent Splits Price Volatility 206.0 Monthly High/Low 70.0 Rel Strength to S&P 500 24.0 52 week High/Low $ 7.0 284.72-186.51 410 Terry Avenue North 2.0 10 Year High/Low $ Seattle, WA 98109-5210 284.72-18.55 Phone: +1 206 266-1000 11.0 Trading Volume Million Website: http://www.amazon.com 2.0 Growth Rates Compound Annual 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD Stock Performance Grade: A 1 Yr 3 Yr 5 Yr 10 Yr Revenue % 27.1 35.6 32.7 31.6 178.6 -15.8 6.5 -16.3 134.8 -44.6 162.3 33.8 -3.8 44.9 7.1 Total Return % Operating Income % -21.6 -15.7 0.6 26.6 149.9 -26.7 1.5 -32.1 129.3 -7.6 135.9 18.7 -5.9 28.9 -4.3 +/- Market Earnings/Share % — — — — 105.3 -43.0 12.4 -12.0 126.7 -1.4 89.7 6.3 0.2 13.9 -3.9 +/- Industry Dividends % — — — — — — — — — — — — — — — Dividend Yield % Book Value/Share % 5.8 15.1 44.3 30.5 21105 18073 19542 16254 38462 21991 59727 81180 78718 113895 122174 Market Cap $Mil Stock Total Return 41.2 23.2 28.2 26.7 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TTM Financials (USD) +/- Industry 16.1 7.6 14.1 14.6 5264 6921 8490 10711 14835 19166 24509 34204 48077 61093 61093 Revenue $Mil +/- Market 23.5 11.8 23.3 18.9 23.9 23.2 24.0 22.9 22.6 22.3 22.6 22.4 22.4 24.8 24.8 Gross Margin % 271 440 432 389 655 842 1129 1406 862 676 676 Oper Income $Mil Profitability Analysis 5.1 6.4 5.1 3.6 4.4 4.4 4.6 4.1 1.8 1.1 1.1 Operating Margin % Grade: D Current 5 Yr Avg Ind Mkt Return on Equity % -0.5 16.6 17.6 19.8 35 588 359 190 476 645 902 1152 631 -39 -39 Net Income $Mil Return on Assets % -0.1 5.3 7.3 8.1 0.08 1.39 0.78 0.45 1.12 1.49 2.04 2.53 1.37 -0.09 -0.09 Earnings Per Share $ Revenue/Employee $K 691.1 899.2 — 1038.2 — — — — — — — — — — — Dividends $ Fixed Asset Turns 10.6 18.7 9.3 7.0 419 425 426 424 424 432 442 456 461 453 453 Shares Mil Inventory Turns 8.3 9.9* 4.9 12.0 -2.58 -0.56 0.59 1.05 2.88 6.23 11.84 15.22 17.06 18.04 18.02 Book Value Per Share $ Gross Margin % 24.8 22.9 31.3 43.2 392 566 733 702 1405 1697 3293 3495 3903 4180 4180 Oper Cash Flow $Mil Operating Margin % 1.1 3.2 4.4 18.6 -46 -89 -204 -216 -224 -333 -373 -979 -1811 -3785 -3785 Cap Spending $Mil Net Margin % -0.1 2.3 4.2 13.1 346 477 529 486 1181 1364 2920 2516 2092 395 395 Free Cash Flow $Mil Free Cash Flow/Rev % 0.7 6.3 5.7 11.6 R&D/Rev % 7.5 5.8 0.6 — 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TTM Profitability 1.7 21.7 10.3 4.7 8.8 8.7 8.2 7.1 2.9 -0.1 -0.1 Return on Assets % Financial Position (USD) — — 3779.0 56.1 58.5 33.3 22.8 19.0 8.6 -0.5 -0.5 Return on Equity % Grade: B 12-11 $Mil 12-12 $Mil 2.54 2.56 2.45 2.66 2.74 2.59 2.22 2.10 2.18 2.11 2.11 Asset Turnover Cash 5269 8084 0.7 8.5 4.2 1.8 3.2 3.4 3.7 3.4 1.3 -0.1 -0.1 Net Margin % Inventories 4992 6031 — — 15.0 10.1 5.4 3.1 2.6 2.7 3.3 4.0 4.0 Financial Leverage Receivables 2571 3364 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 12-12 Financial Health (USD) Current Assets 17490 21296 1945 1855 1480 1247 1282 409 109 184 255 3084 3084 Long-Term Debt $Mil Fixed Assets 4417 7060 -1036 -227 246 431 1197 2672 5257 6864 7757 8192 8192 Total Equity $Mil Intangibles 1955 2552 — — 6.02 2.89 1.07 0.15 0.05 0.09 0.03 0.38 0.38 Debt/Equity Total Assets 25278 32555 568 919 1030 841 1450 1411 2433 3375 2594 2294 2294 Working Capital $Mil Payables 11145 13318 Short-Term Debt — — 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TTM Valuation Current Liabilities 14896 19002 666.7 31.8 60.6 87.7 82.6 34.4 65.8 70.9 126.6 -2500.0 -3333.3 Price/Earnings Long-Term Debt 255 3084 0.3 0.0 — — 0.1 0.0 0.0 0.0 — -1.7 -200.8 P/E vs. Market Total Liabilities 17521 24363 4.2 2.7 2.4 1.6 2.6 1.2 2.4 2.4 1.7 1.9 2.0 Price/Sales Total Equity 7757 8192 -20.4 -79.4 79.4 37.7 32.2 8.2 11.4 11.8 10.2 13.9 14.9 Price/Book 56.2 33.2 27.4 23.9 27.9 13.1 18.1 23.5 20.4 27.2 29.2 Price/Cash Flow Valuation Analysis Current 5 Yr Avg Ind Mkt Quarterly Results (USD) Close Competitors - Revenue $Mil Mar Jun Sep Dec Mkt Cap $Mil Rev $Mil P/E ROE% Price/Earnings 3333.3 -440.5 75.8 16.6 Forward P/E 62.9 — — 14.1 Most Recent 13185.0 12834.0 13806.0 21268.0 Wal-Mart Stores Inc 256909 469162 15.6 23.0 Price/Cash Flow 29.2 20.4 17.1 9.7 Previous 9857.0 9913.0 10876.0 17431.0 eBay Inc 68744 14543 25.6 13.6 Price/Free Cash Flow 312.5 78.6 37.3 26.3 Rev Growth % Mar Jun Sep Dec Major Fund Holders Most Recent 33.8 29.5 26.9 22.0 Dividend Yield % — — 0.3 2.3 % of shares Previous 38.2 51.0 43.9 34.6 Price/Book 14.9 11.1 5.0 2.3 American Funds Growth Fund of Amer A 3.53 Earnings Per Share $ Mar Jun Sep Dec Price/Sales 2.0 1.9 1.3 2.7 Fidelity Contrafund 1.29 Most Recent 0.28 0.01 -0.60 0.21 PEG Ratio 1.0 — — 1.9 T. Rowe Price Growth Stock 1.18 *3Yr Avg data is displayed in place of 5 Yr Avg Previous 0.44 0.41 0.14 0.38

©2013 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, (2) may include, or be derived from, account ® information provided by your financial advisor which cannot be verified by Morningstar, (3) may not be copied or redistributed, (4) do not constitute investment advice offered by Morningstar, (5) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, Morningstar shall not be responsible for any ß trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supplemental sales literature. If applicable it must be preceded or accompanied by a prospectus, or equivalent, and disclosure statement. Morningstar's Approach to Rating Stocks

Our Key Investing Concepts At Morningstar, we evaluate stocks as pieces of a just on movement in the share price. If we think a stock's TM Economic Moat Rating business, not as pieces of paper. We think that purchasing fair value is $50, and the shares decline to $40 without Discounted Cash Flow Discount Rate shares of superior businesses at discounts to their much change in the value of the business, the star rating Fair Value intrinsic value and allowing them to compound their value will go up. Our estimate of what the business is worth Uncertainty over long periods of time is the surest way to create hasn't changed, but the shares are more attractive as an Margin of Safety Consider Buying/Consider Selling wealth in the stock market. investment at $40 than they were at $50. Stewardship Grades We rate stocks 1 through 5 stars, with 5 the best and 1 Because we focus on the long-term value of businesses, the worst. Our star rating is based on our analyst's rather than short-term movements in stock prices, at times estimate of how much a company's business is worth per we may appear out of step with the overall stock market. share. Our analysts arrive at this "fair value estimate" by When stocks are high, relatively few will receive our forecasting how much excess cash--or "free cash highest rating of 5 stars. But when the market tumbles, flow"--the firm will generate in the future, and then many more will likely garner 5 stars. Although you might adjusting the total for timing and risk. Cash generated expect to see more 5-star stocks as the market rises, we next year is worth more than cash generated several years find assets more attractive when they're cheap. down the road, and cash from a stable and consistently profitable business is worth more than cash from a We calculate our star ratings nightly after the markets cyclical or unsteady business. close, and issue them the following business day, which is why the rating date on our reports will always be the Stocks trading at meaningful discounts to our fair value previous business day. We update the text of our reports estimates will receive high star ratings. For high-quality as new information becomes available, usually about once businesses, we require a smaller discount than for or twice per quarter. That is why you'll see two dates on mediocre ones, for a simple reason: We have more every Morningstar stock report. Of course, we monitor confidence in our cash-flow forecasts for strong market events and all of our stocks every business day, so companies, and thus in our value estimates. If a stock's our ratings always reflect our analyst's current opinion. market price is significantly above our fair value estimate, it will receive a low star rating, no matter how wonderful we think the business is. Even the best company is a bad Economic MoatTM Rating TM deal if an investor overpays for its shares. The Economic Moat Rating is our assessment of a firm's ability to earn returns consistently above its cost of capital Our fair value estimates don't change very often, but in the future, usually by virtue of some competitive market prices do. So, a stock may gain or lose stars based advantage. Competition tends to drive down such

Morningstar Research Methodology for Valuing Competitive Economic Company Fair Value Uncertainty TM Companies Analysis Moat Rating Valuation Estimate Assessment Q Q Q Q Q

Analyst conducts The depth of the Analyst considers DCF model leads to An uncertainty Q The current stock company and industry firm's competitive company financial the firm's Fair Value assessment QQ price relative to fair research: advantage is rated: statements and Estimate, which establishes the QQQ value, adjusted competitive position anchors the rating margin of QQQQ for uncertainty, Management None to forecast future framework. safety required for QQQQQ determines the interviews Narrow cash flows. the stock rating. rating. Conference calls Wide Trade-show visits Assumptions are Competitor, supplier, input into a dis- distributor, and counted cash-flow customer interviews model.

© 2012 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß Morningstar's Approach to Rating Stocks (continued)

economic profits, but companies that can earn them for an Very High, or Extreme. The greater the level of uncertainty, extended time by creating a competitive advantage the greater the discount to fair value required before a possess an Economic Moat. We see these companies as stock can earn 5 stars, and the greater the premium to fair superior investments. value before a stock earns a 1-star rating.

Discounted Cash Flow Margin of Safety This is a method for valuing companies that involves This is the discount to fair value we would require before projecting the amount of cash a business will generate in recommending a stock. We think it's always prudent to the future, subtracting the amount of cash that the buy stocks for less than they're worth.The margin of safety company will need to reinvest in its business, and using is like an insurance policy that protects investors from bad the result to calculate the worth of the firm. We use this news or overly optimistic fair value estimates. We require technique to value nearly all of the companies we cover. larger margins of safety for less predictable stocks, and smaller margins of safety for more predictable stocks.

Discount Rate We use this number to adjust the value of our forecasted Consider Buying/Consider Selling cash flows for the risk that they may not materialize. For a The consider buying price is the price at which a stock profitable company in a steady line of business, we'll use would be rated 5 stars, and thus the point at which we a lower discount rate, also known as "cost of capital," would consider the stock an extremely attractive than for a firm in a cyclical business with fierce purchase. Conversely, consider selling is the price at competition, since there's less risk clouding the firm's which a stock would have a 1 star rating, at which point future. we'd consider the stock overvalued, with low expected returns relative to its risk.

Fair Value This is the output of our discounted cash-flow valuation Stewardship Grades models, and is our per-share estimate of a company's Our corporate Stewardship Rating represents our intrinsic worth. We adjust our fair values for off-balance assessment of management's stewardship of shareholder sheet liabilities or assets that a firm might have--for capital, with particular emphasis on capital allocation example, we deduct from a company's fair value if it has decisions. Analysts consider companies' investment issued a lot of stock options or has an under-funded strategy and valuation, financial leverage, dividend and pension plan. Our fair value estimate differs from a "target share buyback policies, execution, compensation, related price" in two ways. First, it's an estimate of what the party transactions, and accounting practices. Corporate business is worth, whereas a price target typically reflects governance practices are only considered if they've had a what other investors may pay for the stock. Second, it's a demonstrated impact on shareholder value. Analysts long-term estimate, whereas price targets generally focus assign one of three ratings: "Exemplary," "Standard," and on the next two to 12 months. "Poor." Analysts judge stewardship from an equity holder's perspective. Ratings are determined on an absolute basis. Most companies will receive a Standard rating, and this is Uncertainty the default rating in the absence of evidence that To generate the Morningstar Uncertainty Rating, analysts managers have made exceptionally strong or poor capital consider factors such as sales predictability, operating allocation decisions. leverage, and financial leverage. Analysts then classify their ability to bound the fair value estimate for the stock into one of several uncertainty levels: Low, Medium, High,