evadimensions Analysis of Amazon, ebay, Apple, and Google

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1 The The path to to financial truth. truth. evadimensions Analysis of Amazon, ebay, Apple, and Google Craig Sterling Managing Director Head of Global Equity Research (212) Austin Burkett, CFA Senior Vice President (212) February 27, 2012 The Path to Financial Truth Financial intelligence for finding alpha EVA is a registered service mark of EVA Dimensions LLC (in the field of financial data, valuation analytics, and investment management) and EVA is a registered mark of EVA Dimensions (in financial data, software, valuation analytics, and investment management and research) and of Stern Stewart & Co. (in the field of of financial Stern and Stewart incentive & Co. consulting). (in the field EVA of Momentum financial and PRVit incentive are registered consulting). marks Copyright of EVA Dimensions by EVA Copyright Dimension 2011 by LLC. EVA All Dimension. rights reserved All rights reserved.

2 Summary For AMZN, GOOG, AAPL, and EBAY, market-implied incremental EVA growth has eroded significantly, and, with the exception of AAPL, recent EVA Momentum has been negative. Embedded expectations for EVA Margin expansion are wide-ranging, from -170 bps to +120 bps per year for next 5 years. AAPL: EVA Momentum is accelerating and is highest in the group Has the lowest embedded expectations (down 170 bps per year over next 5 years) GOOG: Group-high EVA Margin is showing signs of strain, with Working Capital + Intangible Charges increasing more than 800 bps over the last 5 years EVA Momentum is declining; embedded expectations are for a modest decrease AMZN: Lowest EVA Margin of the group, with a declining trend in EVA Margin and Momentum AMZN s relatively thin EVA Margin is nearly 30% lower than a year ago PP&E Rent Charges were up 100 bps last year, pointing to increasing property costs in the mix Market-implied EVA Margin expectations call for a modest +10 bps per year, which would return the company to its running average of about 3% since 2005 EBAY: Priced for a significant EVA Margin increase, which would follow an improving trend since 2009 Highest EVA Margin volatility Rankings: GOOG scores best in evadimensions PRVit quant rankings with the largest gap between current valuation and intrinsic value resulting in a Buy rating. However, we would heed the company s EVA Momentum downturn. AAPL is an Overweight, and AMZN and EBAY are Holds. 2

3 EVA Income Statement Comparison Benchmark: Internet Software & Services Currency: U.S. Dollar 50th AMZN 2011TFQ4 EBAY 2011TFQ4 AAPL 2012TFQ1 GOOG 2011TFQ4 Scale: Values in Millions Percentile Value Percentile Value Percentile Value Percentile Value Percentile EVA Margins Fiscal Year Ends: December Fiscal Year Ends: December Fiscal Year Ends: September Fiscal Year Ends: December Sales Growth Rate 24.4% 40.6% % % % 60 Cash Operating Costs (% of Sales) 66.7% 86.4% % % % 95 COGS (Adj) % of Sales 33.0% 77.6% % % SG&A (Adj) % of Sales 29.6% 8.8% % % % 81 EBITDAR Margin (EBITDAR/Sales) 33.3% 13.6% % % % 95 Productive Capital Rental Charge (% of Sales) 27.6% 9.5% % % % 50 Cap Chrg: Working Capital % of Sales 2.0% -0.2% % % 36 Rent Chrg: Net PP&E Adjusted % of Sales 8.6% 4.1% % % % 41 Rent Chrg: Intangible Capital AT % of Sales 1 5.5% % % % 42 EVA Before Tax Margin (EVABT/Sales) 5.1% 4.2% % % % 86 EVA Effective Tax Rate 37% 37% 51 23% 77 36% 54 32% 64 Other EVA (% of Sales) 1.4% 0.3% % % 5 2.5% 64 Rent Charge: Goodwill & Sp Items (% of Sales) 4.7% 0.4% % % % 64 EVA Margin (EVA/Sales) -0.8% 2.5% % % % 85 EVA Momentum EVA Momentum (% of Trailing Sales) 2.2% 0.1% % % % 62 Implied EVA Momentum 10 Yr (Sales) 2.8% 1.4% % % % 51 PRVit Scores PRVit Prime Score PRVit Global Score Performance Score (P) vs. Global Risk Score (R) vs. Global Valuation Score (V) vs. Global EBAY and GOOG have much higher PP&E Rent Charges than AMZN and AAPL. We would expect AMZN to have a higher PP&E Charge, given its warehouse and web services (AWS) exposure. EBAY s 21.7% Intangible Capital Rent Charge stands out as high. It is well above GOOG s 14.4%. This is the period amortization of the capitalized R&D and Ad & Promo expenses. 3

4 EVA History GOOG and AAPL lead the group in EVA Margin. However, AAPL s is accelerating, while others are declining. 4

5 Market Implied EVA Momentum Early-stage companies typically carry a very high implied EVA Momentum, as future value creation is well above current value creation. GOOG and EBAY have the highest expectations now, at just under 5.0%, while AMZN and AAPL s are about half these, in the 2%-2.5% range. 5

6 Future Growth Reliance = FVA / Market Value EVA Expectations: Future Growth Reliance Future Growth Reliance = FVA / Market Value /31/ /31/ /31/ /31/ /31/2010 AAPL AMZN EBAY GOOG -1 12/31/ /31/ /31/ /31/2011 AAPL AMZN EBAY GOOG These companies carried very high future growth premiums more than a decade ago. These premiums have declined as the companies have matured. Roughly 40% of company value is ascribed to incremental value creation now versus about 90% in At above 70%, AMZN is a relative standout. 6

7 EVA % of Sales AMZN Share Price (US$) AMAZON.COM INC AMZN $83.1B mkt. cap. $ Internet & Catalog Retail Performance Score (P) P1 Profitability EVA Margin (EVA/Sales) EVA Spread (EVA/Capital) P2 Trend EVA Momentum (vs Cap) 3 Year Trend (ΔEVA/Cap) Last Quarter (ΔEVA/Cap) Risk Score (R) Stock Price Volatility EVA Margin Variability Total Debt/Total Capital Total Debt/EBITDAR Valuation Score (V) MVA Margin MVA Spread V2 Wealth Multiples EBITDAR Multiple NOPAT Multiple Future Growth Reliance AMZN 25th 50th 75th % Global 2.5% -4.0% 0.6% 5.2% % -3.3% 0.6% 5.9% 91 AMZN 25th 50th 75th % Global 0.7% -1.5% 0.7% 3.3% % -0.9% 0.4% 2.0% % -2.6% 0.3% 3.1% 25 AMZN 25th 50th 75th % Global 39% 33% 41% 51% % 2.6% 5.8% 13.3% 3 R2 Vulnerability Leveraged, negative cash flow firms are suspect Free Cash Flow Rate Op Cash Gen Return Higher is better Financial strength in generating a return on capital over the full cost The growth rate in the firm's economic profit (its EVA) Lower is better R1 Volatility Variability in stock price and the EVA profit margin AMZN 25th 50th 75th % Global -21% 6% -3% -14% 83 74% 36% 15% 6% 14 27% 5% 26% 46% Lower is better V1 Wealth Ratios Valuation multiples to book capital (as adjusted) AMZN 25th 50th 75th % Global 150% -9% 29% 115% % -10% 28% 106% 98 Valuation multiples to cash flow, earnings, EVA AMZN 25th 50th 75th % Global % -18% 22% 59% 80 PRVit PRVit PRVit PRVit Share Prime Prime Date Global Price Score Vs Score Vs Prime Score SubSector Country Score 17-Feb-12 $ Prime Score Rating versus Global Sub-Sector Sell 0-19 Underweight EVA Margin vs. Share Price 5.0% 3.0% 1.0% -1.0% -3.0% Hold Overweight % AMZN Share Price (US$) AMZN - EVA % of Sales EVA Momentum Implied EVA Margin Implied EVA Momentum Buy EVA Margin and Momentum is declining and expectations call for a return to 3%. Share price has appeared to follow EVA Momentum. $250 $200 $150 $100 $50 $0 7

8 Future Growth Reliance EVA Margin million AMAZON.COM INC AMZN $83.1B mkt. cap. $ Internet & Catalog Retail Market Value Added vs. CVA and FVA $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 ($20,000) Capital Current Value Added (EVA/COC) Future Value Added (MVA-CVA) Market Value Future Growth Reliance 350% 1 300% 8.0% 6.0% 250% 4.0% 200% 2.0% 150% -2.0% 100% -4.0% -6.0% 50% -8.0% 0% Future Growth Reliance = FVA / Market Value AMZN - EVA % of Sales AMZN has grown a substantial market premium to Capital, and EVA Margins have started to decline. EVA Margin has been declining over the last year, falling from a roughly 3% average since Embedded expectations for incremental EVA are fairly high, at about 70% of firm value. 8

9 AMAZON.COM INC AMZN $83.1B mkt. cap. $ Internet & Catalog Retail AMZN - EVA Margin and Momentum Summary Fiscal Period: 2002TFQ4 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 Period Ending: 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend Sales 3,933 5,264 6,921 8,490 10,711 14,835 19,166 24,509 34,204 48, % CAGR Sales Growth Rate 26.0% 33.8% 31.5% 22.7% 26.2% 38.5% 29.2% 27.9% 39.6% 40.6% COGS Adjusted % of Sales 73.8% 76.2% 76.9% 76.0% 77.1% 77.4% 77.7% 77.4% 77.7% 77.6% SG&A Adjusted % of Sales 14.2% 9.7% 9.7% 8.6% 8.0% 8.2% 8.2% 8.2% 8.4% 8.8% Cash Operating Costs as % of Sales 88.0% 85.9% 86.6% 84.6% 85.1% 85.6% 85.9% 85.7% 86.0% 86.4% EBITDAR Margin 12.1% 14.1% 13.4% 15.4% 14.9% 14.4% 14.1% 14.3% 14.0% 13.6% Cap Chrg: Working Capital % of Sales -0.6% -0.6% -0.6% -0.5% -0.5% -0.5% -0.1% -0.4% -0.2% -0.2% Rent Chrg: Net PP&E Adjusted % of Sales 5.4% 3.6% 2.7% 3.2% 4.2% 3.5% 3.1% 3.0% 3.1% 4.1% EVA From Operations Margin 7.2% 11.2% 11.3% 12.7% 11.2% 11.4% 11.1% 11.7% 11.1% 9.7% Rent Chrg: Intangible Capital AT % of Sales 9.1% 7.5% 6.1% 5.7% 5.7% 5.4% 5.7% 5.7% 5.5% 5.5% EVA Before Tax Margin -1.8% 3.7% 5.1% 7.1% 5.5% 6.0% 5.4% 6.0% 5.6% 4.2% EVA Effective Tax Rate EVA Tax % of EVA Before Tax -83.7% 85.2% 63.9% 53.1% 52.3% 47.8% 42.9% % 36.9% EVA After Tax Margin -3.4% 0.5% 1.9% 3.3% 2.6% 3.2% 3.1% 3.6% 3.5% 2.6% Other EVA % of Sales -1.0% -1.0% 0.2% 0.7% 0.4% 0.4% 0.5% 0.2% 0.4% 0.3% EVAxGW&SI Margin -4.4% -0.5% 2.1% 4.0% 3.0% 3.5% 3.5% 3.8% 3.9% 2.9% Rent Chrg: Goodwill & Special Items % of Sales 0.9% 0.7% 0.5% 0.5% 0.5% 0.4% 0.3% 0.3% 0.4% 0.4% EVA Margin -5.3% -1.1% 1.5% 3.5% 2.6% 3.2% 3.2% 3.5% 3.5% 2.5% EVA Momentum (Delta EVA/Trailing Sales) 15.1% 3.8% 3.1% 2.7% -0.2% 1.8% 0.9% 1.3% 1.3% 0.1% AMZN s 100 bps EVA Margin decline in 2011 was primarily due to a 100 bps increase in PP&E Rental Charges. This is the most important line item to watch as AMZN expands its warehouse footprint and Amazon Web Services capacity. 9

10 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 Sales Growth EVA Margin AMAZON.COM INC AMZN $83.1B mkt. cap. $ Internet & Catalog Retail 45.0% % % % 38.5% 29.2% 27.9% 39.6% 40.6% 28.9%28.5% 26.0%26.0% 19.0% 15.0% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 3.2% 3.2% 3.5% 3.5% 2.5% 2.6% 2.7% 2.8% 2.9% 3.0% 3.0% 1 1.0% 5.0% 0.5% Assuming consensus sales estimates, AMZN s EVA Margin needs to increase from 2.5% in 2011 to 3.0% in 2021 (+10 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 2.5% to 3.5%. 10

11 AMAZON.COM INC AMZN $83.1B mkt. cap. $ Internet & Catalog Retail Benchmark: Multiline Retail Currency: U.S. Dollar 50th AMZN 2011TFQ4 WMT 2011TFQ3 COST 2012TFQ1 Scale: Values in Millions Percentile Value Percentile Value Percentile Value Percentile EVA Margins Fiscal Year Ends: December Fiscal Year Ends: January Fiscal Year Ends: August Sales Growth Rate 13.0% 40.6% % % 53 Cash Operating Costs (% of Sales) 83.6% 86.4% % % 5 COGS (Adj) % of Sales 60.3% 77.6% % % 5 SG&A (Adj) % of Sales 22.1% 8.8% % % 95 EBITDAR Margin (EBITDAR/Sales) 16.4% 13.6% % % 5 Productive Capital Rental Charge (% of Sales) 14.4% 9.5% % % 95 Cap Chrg: Working Capital % of Sales 0.7% -0.2% % % 66 Rent Chrg: Net PP&E Adjusted % of Sales 11.3% 4.1% % % 95 Rent Chrg: Intangible Capital AT % of Sales 0.4% 5.5% 5 0.6% EVA Before Tax Margin (EVABT/Sales) 2.3% 4.2% % % 45 EVA Effective Tax Rate 34% 37% 44 35% 47 37% 44 Other EVA (% of Sales) -0.3% 0.3% % % 72 Rent Charge: Goodwill & Sp Items (% of Sales) 0.2% 0.4% % EVA Margin (EVA/Sales) 0.1% 2.5% % % 54 EVA Momentum EVA Momentum (% of Trailing Sales) 0.2% 0.1% % % 50 Implied EVA Momentum 10 Yr (Sales) 0.3% 1.3% % PRVit Scores PRVit Prime Score PRVit Global Score Performance Score (P) vs. Global Risk Score (R) vs. Global Valuation Score (V) vs. Global Comparing AMZN to its bricks-and-mortar competitors, at 4.1%, its PP&E Rent Charge is only 40 bps lower than WMT s. AMZN s EBITDAR margin advantage is largely wiped out by its relatively high Intangible Capital Charges. Bottom-line EVA Margin is only 40 bps better than WMT s. SG&A costs are similar to COST s (WMT s are nearly double these). AMZN s superior Working Capital management is clear, at 50 bps better than WMT s and COST s. 11

12 EVA % of Sales AAPL Share Price (US$) APPLE INC AAPL $472.3B mkt. cap. $ Computers & Peripherals Performance Score (P) P1 Profitability EVA Margin (EVA/Sales) EVA Spread (EVA/Capital) P2 Trend EVA Momentum (vs Cap) 3 Year Trend (ΔEVA/Cap) Last Quarter (ΔEVA/Cap) Risk Score (R) Stock Price Volatility EVA Margin Variability Total Debt/Total Capital Total Debt/EBITDAR Valuation Score (V) MVA Margin MVA Spread V2 Wealth Multiples EBITDAR Multiple NOPAT Multiple Future Growth Reliance AAPL 25th 50th 75th % Global 18.3% -4.0% 0.6% 5.2% % -3.3% 0.6% 5.9% 98 AAPL 25th 50th 75th % Global 42.9% -1.5% 0.7% 3.3% % -0.9% 0.4% 2.0% % -2.6% 0.3% 3.1% 99 AAPL 25th 50th 75th % Global 27% 33% 41% 51% 9 2.8% 2.6% 5.8% 13.3% 27 R2 Vulnerability Leveraged, negative cash flow firms are suspect Free Cash Flow Rate Op Cash Gen Return Higher is better Financial strength in generating a return on capital over the full cost The growth rate in the firm's economic profit (its EVA) Lower is better R1 Volatility Variability in stock price and the EVA profit margin AAPL 25th 50th 75th % Global -18% 6% -3% -14% % 36% 15% 6% 4 2% 5% 26% 46% Lower is better V1 Wealth Ratios Valuation multiples to book capital (as adjusted) AAPL 25th 50th 75th % Global 299% -9% 29% 115% % -10% 28% 106% 95 Valuation multiples to cash flow, earnings, EVA AAPL 25th 50th 75th % Global % -18% 22% 59% 54 PRVit PRVit PRVit PRVit Share Prime Prime Date Global Price Score Vs Score Vs Prime Score SubSector Country Score 17-Feb-12 $ Prime Score Rating versus Global Sub-Sector Sell % 1 Underweight EVA Margin vs. Share Price 5.0% -5.0% -1 Hold Overweight % AAPL Share Price (US$) AAPL - EVA % of Sales EVA Momentum Implied EVA Margin Implied EVA Momentum Buy EVA Momentum has defined AAPL share price movement. Market-implied expectations appear very low. $600 $500 $400 $300 $200 $100 $0 12

13 million APPLE INC AAPL $472.3B mkt. cap. $ Computers & Peripherals Future Growth Reliance EVA Margin Market Value Added vs. CVA and FVA $500,000 $400,000 $300,000 $200,000 $100,000 $0 ($100,000) Capital Current Value Added (EVA/COC) Future Value Added (MVA-CVA) Market Value AAPL s future growth premium has declined as it has grown, with less and less firm value associated with incremental growth. A brief EVA Margin dip a year ago has reversed, with the firm reaching a new margin high in its latest quarter. Future Growth Reliance 300% 250% 200% 150% 100% 50% % 1 5.0% -5.0% -1 0% -15.0% Future Growth Reliance = FVA / Market Value AAPL - EVA % of Sales 13

14 APPLE INC AAPL $472.3B mkt. cap. $ Computers & Peripherals AAPL - EVA Margin and Momentum Summary Fiscal Period: 2003TFQ1 2004TFQ1 2005TFQ1 2006TFQ1 2007TFQ1 2008TFQ1 2009TFQ1 2010TFQ1 2011TFQ1 2012TFQ1 Period Ending: 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend Sales 5,839 6,741 9,763 16,190 20,681 26,499 34,751 46,708 76, , % CAGR Sales Growth Rate 1.9% 15.5% 44.8% 65.8% 27.7% 28.1% 31.1% 34.4% 63.3% 67.6% COGS Adjusted % of Sales 75.7% 73.1% 71.1% 70.1% 68.0% 63.2% 62.5% 57.0% 59.4% 55.6% SG&A Adjusted % of Sales 15.7% 15.9% 13.4% 10.9% 10.5% 10.5% 9.9% 8.3% 7.2% 5.8% Cash Operating Costs as % of Sales 91.4% 89.1% 84.5% 81.0% 78.5% 73.7% 72.4% 65.3% 66.6% 61.4% EBITDAR Margin 8.6% 10.9% 15.5% 19.0% 21.5% 26.3% 27.7% 34.7% 33.4% 38.6% Cap Chrg: Working Capital % of Sales -0.5% -0.2% -0.1% 0.2% 0.2% 0.1% Rent Chrg: Net PP&E Adjusted % of Sales 6.7% 5.7% 4.7% 3.3% 3.2% 3.2% 3.5% 3.3% 2.9% 2.9% EVA From Operations Margin 2.4% 5.4% 10.9% 15.7% 18.2% 23.1% 24.0% 31.3% 30.5% 35.7% Rent Chrg: Intangible Capital AT % of Sales 13.4% 11.8% 8.2% 5.4% 4.8% 4.6% 4.3% 3.7% 2.8% 2.3% EVA Before Tax Margin -11.0% -6.4% 2.7% 10.4% 13.3% 18.5% 19.7% 27.6% 27.7% 33.4% EVA Effective Tax Rate EVA Tax % of EVA Before Tax 41.6% 41.8% 45.9% % 37.0% 36.6% 36.5% 35.4% 35.7% EVA After Tax Margin -6.4% -3.7% 1.4% 6.2% 8.4% 11.6% 12.5% 17.5% 17.9% 21.4% Other EVA % of Sales 0.9% 1.0% 1.4% 1.4% 1.9% 2.0% -0.2% -2.3% -3.0% EVAxGW&SI Margin -6.4% -2.8% 2.4% 7.6% 9.7% 13.6% 14.5% 17.3% 15.5% 18.5% Rent Chrg: Goodwill & Special Items % of Sales 1.8% 1.5% 1.1% 0.6% 0.5% 0.4% 0.3% 0.2% 0.2% 0.1% EVA Margin -8.2% -4.3% 1.4% 7.0% 9.3% 13.2% 14.2% 17.1% 15.3% 18.3% EVA Momentum (Delta EVA/Trailing Sales) -1.8% 3.2% 6.3% 10.2% 4.9% 7.6% 5.5% 8.7% 8.0% 15.4% Except for Other EVA, AAPL has consistently improved every EVA Margin line item over the past 10 years. AAPL s Working Capital management is excellent, at 0% of sales. Intangible Capital Charges contain capitalized and amortized R&D expense, and this has declined 200 bps over last 3 years, pointing to AAPL s ability to extract large returns from its R&D. 14

15 2008TFQ1 2009TFQ1 2010TFQ1 2011TFQ1 2012TFQ1 2013TFQ1 2014TFQ1 2015TFQ1 2016TFQ1 2017TFQ1 2022TFQ1 2008TFQ1 2009TFQ1 2010TFQ1 2011TFQ1 2012TFQ1 2013TFQ1 2014TFQ1 2015TFQ1 2016TFQ1 2017TFQ1 2022TFQ1 Sales Growth EVA Margin APPLE INC AAPL $472.3B mkt. cap. $ Computers & Peripherals % 31.1%34.4% 67.6% 63.3% % 8.3% 8.3% 8.3% 7.0% % 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% 14.2% 13.2% 17.1% 15.3% 18.3% 16.7% 15.0% 13.3% 11.7% 1 1 Assuming consensus sales estimates, AAPL s EVA Margin can decline from 18.3% in 2012 to 1 in 2017 (-170 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 13.2% to 18.3%. 15

16 EVA % of Sales EBAY Share Price (US$) EBAY INC EBAY $45.2B mkt. cap. $35.06 Internet Software & Services Performance Score (P) P1 Profitability EVA Margin (EVA/Sales) EVA Spread (EVA/Capital) P2 Trend EVA Momentum (vs Cap) 3 Year Trend (ΔEVA/Cap) Last Quarter (ΔEVA/Cap) Risk Score (R) Stock Price Volatility EVA Margin Variability Total Debt/Total Capital Total Debt/EBITDAR Valuation Score (V) MVA Margin MVA Spread V2 Wealth Multiples EBITDAR Multiple NOPAT Multiple Future Growth Reliance EBAY 25th 50th 75th % Global 4.4% -4.0% 0.6% 5.2% % -3.3% 0.6% 5.9% 68 EBAY 25th 50th 75th % Global 1.6% -1.5% 0.7% 3.3% % -0.9% 0.4% 2.0% % -2.6% 0.3% 3.1% 77 EBAY 25th 50th 75th % Global 39% 33% 41% 51% % 2.6% 5.8% 13.3% 41 R2 Vulnerability Leveraged, negative cash flow firms are suspect Free Cash Flow Rate Op Cash Gen Return Higher is better Financial strength in generating a return on capital over the full cost The growth rate in the firm's economic profit (its EVA) Lower is better R1 Volatility Variability in stock price and the EVA profit margin EBAY 25th 50th 75th % Global -11% 6% -3% -14% 71 71% 36% 15% 6% 15 14% 5% 26% 46% Lower is better V1 Wealth Ratios Valuation multiples to book capital (as adjusted) EBAY 25th 50th 75th % Global 223% -9% 29% 115% % -10% 28% 106% 84 Valuation multiples to cash flow, earnings, EVA EBAY 25th 50th 75th % Global % -18% 22% 59% 70 PRVit PRVit PRVit PRVit Share Prime Prime Date Global Price Score Vs Score Vs Prime Score SubSector Country Score 17-Feb-12 $ Prime Score Rating versus Global Sub-Sector Sell % 1 Underweight EVA Margin vs. Share Price 5.0% -5.0% % Hold Overweight EBAY Share Price (US$) EBAY - EVA % of Sales EVA Momentum Implied EVA Margin Implied EVA Momentum Buy EVA Momentum has correlated well with EBAY s share price. Embedded expectations for EVA Margin growth are high. $70 $60 $50 $40 $30 $20 $10 $0 16

17 EBAY INC EBAY $45.2B mkt. cap. $35.06 Internet Software & Services million Future Growth Reliance EVA Margin Market Value Added vs. CVA and FVA $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 ($10,000) Capital Current Value Added (EVA/COC) Future Value Added (MVA-CVA) Market Value Future Growth Reliance 120% 3 100% 2 80% 1 60% 40% -1 20% -2 0% -3-20% Future Growth Reliance = FVA / Market Value EBAY - EVA % of Sales EBAY had extremely high expectations in 2005, with upwards of 90% of firm value associated value creation beyond EVA in perpetuity. During the market drop in early 2009, EBAY s expectations for incremental growth hit 0%, meaning there was an expectation for zero value-added growth beyond EVA in perpetuity. Since, EBAY s valuation has recovered to a point where 50% of firm value is incremental value creation. 17

18 EBAY INC EBAY $45.2B mkt. cap. $35.06 Internet Software & Services EBAY - EVA Margin and Momentum Summary Fiscal Period: 2002TFQ4 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 Period Ending: 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend Sales 1,214 2,165 3,271 4,552 5,970 7,672 8,541 8,727 9,156 11, % CAGR Sales Growth Rate 62.1% 78.3% 51.1% 39.2% 31.1% 28.5% 11.3% 2.2% 4.9% 27.3% COGS Adjusted % of Sales 12.6% 14.2% 13.0% 12.5% 15.2% 17.8% 20.4% 22.1% 21.8% 23.9% SG&A Adjusted % of Sales 55.5% 41.1% 35.9% 35.6% 29.8% 27.7% 27.2% 28.4% 27.5% 28.0% Cash Operating Costs as % of Sales 68.1% 55.3% 48.9% 48.1% 45.0% 45.5% 47.6% 50.6% 49.2% 51.9% EBITDAR Margin 31.9% 44.7% 51.1% 51.9% 55.0% 54.6% 52.4% 49.4% 50.8% 48.1% Cap Chrg: Working Capital % of Sales 2.1% 2.2% 2.2% 0.1% -0.6% -1.2% 1.0% 2.1% 2.1% 1.4% Rent Chrg: Net PP&E Adjusted % of Sales 9.4% 10.2% 10.7% 10.3% 10.2% 8.6% 9.8% 10.2% 10.7% 10.1% EVA From Operations Margin 20.4% 32.3% 38.2% 41.5% 45.4% 47.1% 41.7% 37.2% 37.9% 36.6% Rent Chrg: Intangible Capital AT % of Sales 16.3% 17.1% 17.1% 18.6% 21.6% 21.7% 23.1% 26.0% 24.7% 21.7% EVA Before Tax Margin 4.1% 15.2% 21.1% 22.9% 23.8% 25.4% 18.6% 11.2% 13.2% 14.9% EVA Effective Tax Rate EVA Tax % of EVA Before Tax 63.5% 36.3% 36.2% 34.9% 35.0% 35.0% 30.9% 21.4% 21.6% 23.3% EVA After Tax Margin 1.5% 9.7% 13.5% 14.9% 15.5% 16.5% 12.8% 8.8% 10.3% 11.5% Other EVA % of Sales 1.7% 1.3% 2.3% 1.9% 2.6% 2.8% 2.4% 2.1% 2.0% 0.9% EVAxGW&SI Margin 3.2% 10.9% 15.7% 16.8% 18.1% 19.3% 15.2% 10.8% 12.3% 12.3% Rent Chrg: Goodwill & Special Items % of Sales 4.0% 9.2% 8.1% 9.9% 13.6% 11.9% 11.5% 11.8% 8.5% 7.9% EVA Margin -0.9% 1.7% 7.7% 7.0% 4.5% 7.4% 3.7% -0.9% 3.9% 4.4% EVA Momentum (Delta EVA/Trailing Sales) 8.5% 3.9% 9.9% 2.0% -1.1% 5.0% -3.2% -4.7% 5.0% 1.8% EBAY s PP&E Charge runs at a seemingly high 10.1% relative to other companies that have larger property exposure. EBAY s 27% sales growth in 2011 was accompanied only 50 bps of EVA Margin expansion, whereas 2010 s 4.9% sales growth translated into 480 bps of EVA Margin expansion. 18

19 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 Sales Growth EVA Margin EBAY INC EBAY $45.2B mkt. cap. $35.06 Internet Software & Services % 27.3% 12.0% 10.5% 10.5% 25.0% % 1 5.0% 11.3% 2.2% 4.9% 19.2% 14.3%14.0%14.0%14.0% 1 8.0% 6.0% 4.0% 1 2.0% 7.4% 3.7% 3.9% 4.4% 5.7% 6.9% 8.1% 9.3% -2.0% -0.9% Assuming consensus sales estimates, EBAY s EVA Margin needs to increase from 4.4% in 2011 to 10.5% in 2016 (+120 bps per year over next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from -0.9% to 7.4%. 19

20 EVA % of Sales GOOG Share Price (US$) GOOGLE INC GOOG $199.0B mkt. cap. $ Internet Software & Services Performance Score (P) P1 Profitability EVA Margin (EVA/Sales) EVA Spread (EVA/Capital) P2 Trend EVA Momentum (vs Cap) 3 Year Trend (ΔEVA/Cap) Last Quarter (ΔEVA/Cap) Risk Score (R) Stock Price Volatility EVA Margin Variability Total Debt/Total Capital Total Debt/EBITDAR Valuation Score (V) MVA Margin MVA Spread V2 Wealth Multiples EBITDAR Multiple NOPAT Multiple Future Growth Reliance GOOG 25th 50th 75th % Global 19.4% -4.0% 0.6% 5.2% % -3.3% 0.6% 5.9% 97 GOOG 25th 50th 75th % Global 8.3% -1.5% 0.7% 3.3% % -0.9% 0.4% 2.0% % -2.6% 0.3% 3.1% 81 GOOG 25th 50th 75th % Global 31% 33% 41% 51% % 2.6% 5.8% 13.3% 26 R2 Vulnerability Leveraged, negative cash flow firms are suspect Free Cash Flow Rate Op Cash Gen Return Higher is better Financial strength in generating a return on capital over the full cost The growth rate in the firm's economic profit (its EVA) Lower is better R1 Volatility Variability in stock price and the EVA profit margin GOOG 25th 50th 75th % Global 15% 6% -3% -14% 12 93% 36% 15% 6% 11 10% 5% 26% 46% Lower is better V1 Wealth Ratios Valuation multiples to book capital (as adjusted) GOOG 25th 50th 75th % Global 356% -9% 29% 115% % -10% 28% 106% 95 Valuation multiples to cash flow, earnings, EVA GOOG 25th 50th 75th % Global % -18% 22% 59% 64 PRVit PRVit PRVit PRVit Share Prime Prime Date Global Price Score Vs Score Vs Prime Score SubSector Country Score 17-Feb-12 $ Prime Score Rating versus Global Sub-Sector Sell % % 1 Underweight EVA Margin vs. Share Price 5.0% Hold Overweight Buy % $ GOOG Share Price (US$) GOOG - EVA % of Sales EVA Momentum Implied EVA Margin Implied EVA Momentum GOOG s EVA Momentum declined before a large drop in its shares, and it is declining again. Expectations are for a slight EVA Margin decrease. $800 $700 $600 $500 $400 $300 $200 $100 20

21 million GOOGLE INC GOOG $199.0B mkt. cap. $ Internet Software & Services Future Growth Reliance EVA Margin $250,000 $200,000 $150,000 $100,000 Market Value Added vs. CVA and FVA GOOG s EVA Margin appears to be rolling over, and its proportion of incremental value creation is still high, at around 40%. $50,000 $0 Capital Future Value Added (MVA-CVA) Current Value Added (EVA/COC) Market Value Future Growth Reliance 100% 25.0% 90% 80% 2 70% 60% 15.0% 50% 40% 1 30% 20% 5.0% 10% 0% Future Growth Reliance = FVA / Market Value GOOG - EVA % of Sales 21

22 GOOGLE INC GOOG $199.0B mkt. cap. $ Internet Software & Services GOOG - EVA Income Statement Fiscal Period: 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 Period Ending: 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend Sales 1,466 3,189 6,139 10,605 16,594 21,796 23,651 29,321 37, % CAGR Sales Growth Rate NA 117.6% 92.5% 72.8% 56.5% 31.4% 8.5% 24.0% 29.3% COGS Adjusted % of Sales 40.3% 42.0% 37.2% 35.2% 34.3% 32.7% 31.0% 30.8% 3 SG&A Adjusted % of Sales 16.3% 14.2% 14.9% 12.7% 14.6% 14.7% 12.5% 13.1% 14.6% Cash Operating Costs as % of Sales 56.6% 56.3% 52.1% 47.9% 48.9% 47.4% 43.5% 43.9% 44.6% EBITDAR Margin 43.4% 43.7% 48.0% 52.1% 51.1% 52.6% 56.5% 56.1% 55.4% Cap Chrg: Working Capital % of Sales 1.1% 1.4% 1.7% 1.9% 2.1% 2.4% 2.6% 2.5% 2.8% Rent Chrg: Net PP&E Adjusted % of Sales 6.3% 7.2% 7.4% 9.3% 10.6% 12.2% 12.2% 8.8% 10.1% EVA From Operations Margin 36.0% 35.2% 38.9% 40.9% 38.4% 37.9% 41.7% 44.7% 42.4% Rent Chrg: Intangible Capital AT % of Sales 18.9% 10.6% 7.6% 6.6% 8.4% 11.1% 13.0% 13.6% 14.4% EVA Before Tax Margin 17.1% 24.6% 31.3% 34.4% % 28.7% 31.1% 28.0% EVA Effective Tax Rate EVA Tax % of EVA Before Tax NA 42.0% % 35.4% 34.2% 35.2% 33.9% 31.6% EVA After Tax Margin NA 14.3% 18.8% 21.3% 19.4% 17.7% 18.6% 20.6% 19.2% Other EVA % of Sales -1.3% -0.2% 1.0% 1.8% 2.0% 0.3% 0.8% 2.0% 2.5% EVAxGW&SI Margin 8.7% 14.1% 19.7% 23.0% 21.3% 18.0% 19.4% 22.6% 21.6% Rent Chrg: Goodwill & Special Items % of Sales 0.7% 0.6% 0.6% 0.7% 1.6% 2.7% 2.6% 2.4% 2.3% EVA Margin 8.0% 13.5% 19.2% 22.3% 19.8% 15.3% 16.9% 20.2% 19.4% EVA Momentum (Delta EVA/Trailing Sales) NA 21.4% 23.4% 19.3% 8.6% 0.3% 3.0% 8.2% 4.9% GOOG s EBITDAR Margin has been hitting high points for the last 3 years, but its Intangible Capital Charges (R&D and Ad & Promo expense-driven) have ramped up, and PP&E Charges have been volatile, leading to an EVA Margin that declined from its 2006 peak. Working Capital Charges have increased 90 bps over last 5 years. 22

23 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4 2012TFQ4 2013TFQ4 2014TFQ4 2015TFQ4 2016TFQ4 2021TFQ4 Sales Growth EVA Margin GOOGLE INC GOOG $199.0B mkt. cap. $ Internet Software & Services % 25.0% % 24.0% 29.3% 20.4% 18.6% % % 16.9% 15.3% 20.2% 19.4%18.9%18.4%18.0% 17.5% 17.0% 17.0% 1 8.5% 11.0%11.0%11.0% 8.0% 5.0% Assuming consensus sales estimates, GOOG s EVA Margin can decline from 19.4% in 2011 to 17.0% in 2016 (-50 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 15.3% to 20.2%. 23