Global Equity Research 05 January 2009 Nothing But Net 2009 Internet Investment Guide Global Internet Imran KhanAC (1-212) 622-6693 [email protected] J.P. Morgan Securities Inc. Bridget Weishaar (1-212) 622-5032 [email protected] J.P. Morgan Securities Inc. Lev Polinsky, CFA (1-212) 622-8343 [email protected] J.P. Morgan Securities Inc. Vasily KarasyovAC (1-212) 622-5401 [email protected] J.P. Morgan Securities Inc. China Internet Dick WeiAC (852) 2800-8535 [email protected] J.P. Morgan Securities (Asia Pacific) Limited Russia Internet Elena BazhenovaAC (7-495) 937-7314 [email protected] J.P. Morgan Bank International LLC Korea Internet Angela HongAC (82-2) 758-5719 [email protected] J.P. Morgan Securities (Far East) Limited Please see our separate notes out today changing ratings for Amazon and Dice Holdings. We also have a separate note out today changing estimates and introducing 2009 price targets for the remainder of our Internet coverage. All data and valuation priced as of 30 December 2008. See page 332 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research. Imran Khan Global Equity Research (1-212) 622-6693 05 January 2009 [email protected] Table of Contents Key Investment Themes ..........................................................5 Dot.Khan’s Top Ten Things to Watch for in 2009................15 U.S. Sector Outloooks............................................................17 Search Advertising Outlook ..................................................19 Graphical Advertising Outlook..............................................25 Ad Networks on the Rise .......................................................29 Ad Exchanges: A New Marketplace......................................37 eCommerce Outlook ..............................................................40 Online Travel Outlook ............................................................47 The Mobile Market ..................................................................53 Online Payment Outlook........................................................62 Social Networks Primer .........................................................70 Online Music Primer...............................................................78 The Challenges for Online Video ..........................................81 Widgets: Popularity Is Growing, but Can It Be Monetized?83 Online Photo Market Outlook ................................................86 Cloud Computing Outlook.....................................................90 Virtual Online Worlds Primer.................................................95 Internet for Social Good.......................................................100 International Sector Outlooks .............................................103 China Internet Market Overview..........................................105 Russia Sector Outlook .........................................................140 Korean Internet Outlook ......................................................150 U.S. Company Previews.......................................................155 Amazon.com, Overweight, ($50.76) ....................................157 Blue Nile, Inc., Underweight, ($23.67) .................................166 Dice Holdings, Neutral, ($4.11)............................................174 eBay, Neutral, ($13.96) .........................................................181 Expedia, Overweight, ($7.80)...............................................191 Google, Overweight, ($303.11) ............................................198 IAC, Neutral, ($15.77)............................................................205 MercadoLibre, Overweight, ($15.69) ...................................213 Omniture, Overweight, ($9.85).............................................222 Orbitz Worldwide, Neutral, ($3.65) ......................................229 2 Imran Khan Global Equity Research (1-212) 622-6693 05 January 2009 [email protected] Priceline, Overweight, ($70.82)............................................235 RealNetworks, Inc, Neutral, ($3.55).....................................243 Shutterfly, Inc., Overweight ($6.75).....................................249 ValueClick, Neutral, ($6.56)..................................................257 Yahoo!, Overweight, ($11.97) ..............................................264 International Company Outlooks ........................................273 Baidu, Overweight, ($126.93)...............................................275 China Finance Online, Neutral, ($7.05) ...............................282 NetEase, Neutral, ($22.10)....................................................289 Ninetowns, Neutral, ($0.83)..................................................295 Shanda, Overweight, ($30.75)..............................................300 Sina, Overweight, ($22.89) ...................................................306 Sohu, Overweight, ($46.22)..................................................312 The9, Overweight, ($13.68) ..................................................318 UOL, Neutral, R$7.3..............................................................324 Note: ValueClick is covered by U.S. Advertising & Marketing Services analyst Townsend Buckles. UOL is covered by Latin American Media & Internet analyst Andre Baggio. RealNetworks is covered by Vasily Karasyov. The authors acknowledge the contribution of Jigar Vakharia of J.P. Morgan Services India Private Ltd., Mumbai, and Shelby Taffer, of J.P. Morgan Securities, Inc., to this report. 3 Imran Khan Global Equity Research (1-212) 622-6693 05 January 2009 [email protected] Figure 1: J.P. Morgan Internet Technology Universe $ in millions, except per share data J.P. Morgan Internet Technology Universe Ticker Rating Price Mkt Cap Ent .Val. EPS Y/Y EPS Growth Cal PE PEG EBITDA ($M) Y/Y EBITDA Growth Ent. Val/EBITDA Rev ($M) Y/Y Revenue Growth 12/30 12/30 12/30 2008E 2009E 2010E '07/'08E '08/09E 09/10E 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E '07/'08E '08/09E '09/10E 2008E 2009E 2010E 2008E 2009E 2010E '07/'08E '08/09E '09/10E Search/Advertising Google GOOG OW 303.11 96,321 83,789 19.23 21.16 25.26 23% 10% 19% 15.8 14.3 12.0 0.5 0.4 0.3 9,142 10,210 12,278 32% 12% 20% 9.2 8.2 6.8 15,689 17,597 21,762 35% 12% 24% Yahoo* YHOO OW 11.97 16,729 7,857 0.63 0.33 0.32 34% -48% -3% 18.9 36.3 37.6 0.8 1.5 1.5 1,779 1,847 1,901 -8% 4% 3% 4.4 4.3 4.1 5,422 5,400 5,877 6% 0% 9% Group Average 17.3 25.3 24.8 0.6 0.9 0.9 12% 8% 12% 6.8 6.2 5.5 20% 6% 16% Leading e-Commerce brands Amazon AMZN OW 50.76 22,131 20,627 1.32 1.20 1.54 18% -9% 28% 38.4 42.4 33.1 1.9 2.1 1.7 1,398 1,419 1,734 28% 2% 22% 14.8 14.5 11.9 18,711 21,694 26,165 26% 16% 21% Blue Nile NILE UW 23.67 360 333 0.94 0.76 0.95 -10% -19% 25% 25.3 31.2 24.9 1.3 1.6 1.2 29 26 34 -4% -10% 30% 11.6 12.9 9.9 310 293 323 -3% -6% 10% Dice DHX N 4.11 271 302 0.35 0.28 0.29 34% -20% 2% 11.7 14.5 14.2 0.6 0.7 0.7 67 64 68 7% -5% 6% 4.5 4.7 4.5 156 147 154 9% -6% 5% eBay EBAY N 13.96 17,994 13,812 1.35 1.39 1.57 NA 3% 13% 10.4 10.1 8.9 0.4 0.4 0.4 3,101 3,202 3,470 7% 3% 8% 4.5 4.3 4.0 8,690 9,572 10,770 13% 10% 13% Expedia EXPE OW 7.80 2,275 2,753 1.30 1.26 1.40 6% -3% 11% 6.0 6.2 5.6 0.6 0.6 0.6 781 756 883 7% -3% 17% 3.5 3.6 3.1 2,964 2,919 3,288 11% -2% 13% InterActive Corp IACI N 15.77 2,209 842 0.34 1.02 1.10 NA NA 7% 46.7 15.4 14.4 4.7 1.5 1.4 176 234 258 25% 33% 10% 4.8 3.6 3.3 1,476 1,548 1,687 11%5%9% Mercadolibre MELI OW 15.69 695 632 0.36 0.54 0.75 65% 50% 38% 43.4 28.9 21.0 1.4 1.0 0.7 40 50 69 70% 27% 36% 15.9 12.5 9.2 138 164 219 62% 19% 34% Orbitz Worldwide OWW N 3.65 304 304 (3.63) (0.27) (0.30) NA NA 9% NM NM NM NM NM NM 145 136 143 -1% -6% 5% 2.1 2.2 2.1 895 865 922 6% -3% 7% Priceline.com PCLN OW 70.82 3,460 3,005 5.79 5.64 7.40 43% -3% 31% 12.2 12.6 9.6 0.8 0.8 0.6 365 336 439 60% -8% 30% 8.2 8.9 6.9 1,851 1,837 2,081 33% -1% 13% Real Networks RNWK N 3.55 504 98 (0.05) 0.02 0.02 NA NA 39% NM NM NM NM NM NM 58 71 72 1% 21% 2% 1.7 1.4 1.4 607 595 609 7% -2% 2% Shutterfly SFLY OW 6.75 169 129 0.30 0.43 0.64 -38% 42% 48% 22.3 15.7 10.6 1.1 0.8 0.5 33 49 62 1% 49% 26% 3.9 2.6 2.1 209 224 266 12% 8% 19% Group Average 24.0 19.7 15.8 1.4 1.1 0.9 18% 9% 18% 6.9 6.5 5.3 17% 4% 13% Enabling Platforms Akamai^ AKAM NR 14.46 2,589 2,344 1.61 1.71 1.87 7% 9% 0% 8.4 7.7 7.7 0.3 0.3 0.3 364 409 420 12% 12% 0% 5.7 5.1 5.1 784 882 975 25% 13% 11% Omniture OMTR OW 9.85 752 773 0.42 0.61 0.77 NM 44% 26% NM 16.2 12.8 NM 0.5 0.4 59 77 98 164% 31% 26% 13.1 10.0 7.9 296 410 511 107% 38% 25% Salesforce.com^ CRM NR 30.96 3,724 3,194 0.32 0.52 0.85 69% 50% 0% 59.6 39.7 39.7 1.5 1.0 1.0 159 229 218 31% 44% -5% 24.3 13.9 14.7 1,083 1,350 1,591 46% 25% 18% Websense^ WBSN NR 14.27 646 720 1.36 1.41 1.52 3% 10% 0% 10.2 NA NA 0.7 NA NA 138 124 130 126% -10% 5% 5.2 5.8 5.5 346 354 371 51% 2% 5% Group Average 26.1 21.2 20.1 0.8 0.6 0.6 83% 19% 7% 12.1 8.7 8.3 57% 19% 14% Source: Company reports and J.P.