Silk Road Weekly: And the Winners Are...NFLX And ASKJ

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1 Safa Rashtchy, Senior Research Analyst , Jason M. Avilio, Research Analyst , Reason for Report: Industry Overview Related Companies: AMZN ASKJ CNET 6.99 DCLK DIGI 2.71 DRIV EBAY GSIC HOMS 4.58 IACI INSP JUPM 4.72 LOOK 1.47 NFLX NTES SINA SOHU UNTD YHOO Technology Silk Road Weekly: And the Winners Are...NFLX And ASKJ KEY POINTS: The Silk Road Weekly is our universe publication that covers key Internet stocks and general industry themes. Our goal is to provide weekly updates on what drives these key stocks, upcoming catalysts or warnings to watch for, as well as to address our current investment thesis and valuation analysis. Industry Commentary: The Best Performers in NFLX, ASKJ and Chinese Portals, Yahoo and Amazon Company Commentary: Amazon - A Solid Quarter, Most likely, But Not Much To Go On. Company Updates: Our latest thinking on all our covered companies. Risks: Companies in the Internet sector face many risks, including a slowdown in advertising spending, slower-than-expected migration to e-commerce, failure to monetize users, and operating losses. Consolidation and vertical integration among the key players can also add to volatility of the stocks involved. Finally, we note that a major risk to the Internet stocks is also the potential of valuation multiple contraction if expected high growth rates do not materialize or are seen to be in jeopardy. Page 1 of 9

2 Industry Commentary. And The Winners Are... NFLX And ASKJ Another Good Year. Proving that the models are profitable and facing tremendous growth, Internet stocks had a tremendous performance in Our Internet Index, a market cap-weighed performance measure of nearly 50 Internet stocks, was up about 68% in 2003, once again beating NASDAQ, which was up nearly 47% and the DJIA and the S&P 500, each of which were up nearly 25% (all the "2003" performances referred in this article are for the period Dec.31, Dec. 26, we are assuming these performances will generally hold for the full year period as well). This was the second year that the Internet stocks and our coverage universe beat the broader indices by a wide margin. In fact, the gain is much higher than 68% for most the individual stocks and is brought down by the big market cap and mediocre performance of AOL (TWX - not covered) and a few other big names. Part of this big gain was due to faster-than-expected growth in advertising and search, as well as increased investor interest in the Internet stocks. The leverage of these stocks, dropping over 50% of the incremental revenues to the bottom line, earned them higher multiples that further fueled their stock prices. The Winners. Among our coverage universe and the companies we monitor, Netflix (NFLX, Outperform) was the clear winner in the above $5 price group with a 429% gain, while Ask Jeeves (ASKJ, Market Perform) was the overall winner with a 615% gain. The impressive gain in Netflix shares is no accident: the Company has performed exceedingly well in the face of much skepticism, with many questioning if the Company has a viable business model at all. Thus, it is no surprise that the stock outperformed all others in its category as many skeptics turned into believers. Similarly, Ask Jeeves proved that search destinations, even smaller ones, are highly valuable and will generate significant operating margins. While ASKJ was below $5 in the beginning of the year, which may have made it slightly less liquid for some investors, the impressive 615% return probably tops all the Internet names as well as most, if not all, of the other sector stocks. We believe both Netflix and Ask Jeeves' gains are sustainable and reflect the core value of the two companies. Neither stock seems expensive to us and we believe both have further room for appreciation (see the Company Update section below for our latest thoughts on these and other names in our coverage universe). China Shines. The Chinese portals (SINA, SOHU, NTES), with an average return of nearly 340% outperformed all but the top two (ASKJ and NFLX) Internet companies, demonstrating very high profitability of their models as well as the early stage of the Chinese Internet market. This is despite a fairly deep sell-off in these stocks of late. We continue to believe these stocks will outperform the rest of the Internet sector as the growth opportunity in China is vast and these companies, especially Sina, have a very formidable position and a highly profitable business model, generally with much higher margins than their U.S. counterparts. Large Cap Winners. Within the larger cap groups, Yahoo had an impressive 171% gain, a bit below Amazon's 183% gain but well above ebay at 87% and IACI at 42%. We note that Yahoo, trading at about 23x 2004 EV/EBITDA multiple, continues to be significantly less expensive than Amazon at around 38x, as well as less expensive than ebay which currently trades at around 28x '04 EBITDA IACI remains the "value-priced" stock of the Big Four, getting a much lower multiple of about 15x 2004 EBITDA. The table below lists some of the top gainers in our universe as well as the performance of the Big Four Internet names in Several other names, such as HOMS (439% gain), InfoSpace (189%) and CNET (154%) also had very impressive gains in 2003 (we will publish a full performance table next week with final year-end closing prices). Page 2 of 9

3 Stock Price on 12/31/02 Price on 12/26/03 % Gain ASKJ $18.30 $ % NFLX $58.20 $ % SINA $33.77 $ % SOHU $29.69 $ % NTES $37.61 $ % AMZN $53.47 $ % Yhoo $44.29 $ % ebay $63.40 $ % IACI $32.64 $ % Piper Internet Index 68% NASDAQ 47% S&P % DJIA 24% Amazon.com Inc. $53.47 Market Perform Mkt Cap (MM) $22,607 CY03E CY04E 4Q03E CY03E CY04E Cash /Share $2.52 Rev (MM) $5,215.1 $6,379.2 $1,897.2 P/S 4.3x 3.5x Debt to Total Capital NM EPS $0.16 $0.80 $0.24 P/E 330.4x 67.0x Amazon - A Solid Quarter (probably). Tracking Amazon's performance is becoming increasingly guesswork as the Company is further cutting back on its disclosures. With no physical presence that could provide some ability for statistical surveying, and with the Company not disclosing any meaningful and comparable holiday or mid quarter data, Amazon is increasingly becoming the only major Internet/retail stock that could face increasing volatility as there is no reasonable basis for estimate revisions and quarterly updates. ebay, at the other end of the spectrum, is highly transparent while Yahoo and IACI each have operations that provide sufficient data points to investors and analysts. Amazon, on the other hand, is increasingly becoming a black box. Traffic data is close to being entirely meaningless, as are other third party measurements of Amazon's sales. Further complicating matters is the fact that an increasing (but undisclosed) part of Amazon's sales come from third party merchants - a venue that is nearly impossible for the measurement companies to accurately account for. Amazon continues to withhold this information, citing competitive issues. With no one nearly at the same level as Amazon in offering third party merchant hosting services, we are at a loss as to what type of competitive issues may Amazon face with such a disclosure. Amazon's press release last week had only a single data point of some relevance to its performance, with the disclose of a 2.1 million peak orders, which suggests 23% growth in worldwide units shipped compared to 2002 (2.1 million units shipped on businesses day vs. 1.7 million in 2002). This compares to 33% growth in worldwide revenues that we are forecasting for Amazon, including third party sales. Given the declining average sales prices, this should normally be alarming in itself except that a similar ratio existed last year in Q4 when Amazon actually beat estimates due to higher revenues from other areas. We believe Amazon will beat our middle-of-the guidance estimates but is unlikely to produce results above its guidance. Given the stock's high valuation, anything short of a strong upside may indeed create a sell-off, much as it did in Q Company Updates: ebay (EBAY, Outperform). ebay listings remain strong and we believe our recently raised estimates will prove conservative. We would be opportunistic buyers of ebay heading into a seasonally strong Q4. For the week ending 12/26, domestic listings were 8.0 million, down 16% from last week, which is expected post Christmas. We don't anticipate listings increasing until after new years. InterActiveCorp (IACI, Outperform). As expected, US Airways announced the resumption of ticket sales through Expedia. We had noted two weeks ago that we believed this was only a negotiating tactic and it appears this was exactly the case. IACI recovered after a few weeks of weakness. While this quarter is a seasonally weak quarter for the travel properties and the travel sector may underperform commerce/media Internet stocks in a seasonally strong Q4, we believe the entry point is solid and downside risk in Page 3 of 9

4 minimal, due to the significant cash balance and cash the Company generates. We would be opportunistic buyers of IACI based on its low valuation and strong market share. Yahoo (YHOO, Strong Buy). YHOO remains our top pick as we believe the Company will be the biggest beneficiary of the accelerating growth we are witnessing in the online ad market. We would be buyers of the stock ahead of the Q4 earnings call. Amazon.com (AMZN, Market Perform). Last week, AMZN reported data relating to the Christmas holiday. The only important comp measure the Company released was a new single day record of 2.1m units ordered, up from 1.7m record last December. While it is impossible to measure ASP, sales mix and third-party sales, it seems as if the 24% growth rate is trending in line with our revenue estimate of $1.897b, the high end of the Company's $1.76b-$1.91b guidance range. While we think the quarter will be strong for AMZN as consumers increasingly migrate to the web for commerce, we believe the strong quarter is reflected in the Company's stock price. United Online (UNTD, Outperform). Weakness continues to hurt UNTD shares, as we believe investors are selling volatility toward the end of the years. We believe the business fundamentals remains strong and valuation at this point, in compelling. We would be buyers of the stock. SINA (SINA, Outperform). After checks from our recent trip to China, we believe Sina will report a solid quarter, with SMS and advertising revenues to be likely above our current estimates. In addition, we believe the wireless carriers are unlikely to increase revenue share percentages. We note that our model conservatively assumes slight increase in revenue share model, resulting in lower margins for the Sohu. Sohu (SOHU, Outperform). After checks from our recent trip to China, we believe SOHU will report a solid quarter, with SMS revenues at least in line with our 20% sequential growth estimate. In addition, we believe the wireless carriers are unlikely to increase revenue share percentages. We note that our model conservatively assumes slight increase in revenue share model, resulting in lower margins for the Sohu. NetEase (NTES, Outperform). After checks from our recent trip to China, we believe our SMS estimate of nearly flat sequential sales is conservative and we are likely to see some small growth. In addition, the Company continues to do well in online gaming, which is getting more investor attention. We would be buyers of the stock. DoubleClick (DCLK, Outperform). We recently upgraded shares of DCLK due to our belief that the Company's Motif product will provide upside to our estimates (especially in the back half of '04), and DCLK is going to benefit from an accelerating advertising market. The stock's cheap valuation and conservative Street EPS estimates provided additional support for our upgrade as we saw and minimal downside risk (2.5x cash and $100m repurchase program). We would be buyers of the stock. Netflix (NFLX, Outperform). While the Company's recently revised Q4 guidance provides a high visibility into Q4 results, we believe the Company may still have some positive catalysts on its Q4 call including international expansion plans and the potential to hit its 5m subs and $1b revenue goal a bit faster than originally anticipated. Ask Jeeves (ASKJ, Market Perform). Our checks in the search market indicate both pricing and volume remain strong. We believe the continued positive search trends domestically, along with the new Google relationship internationally, will likely help ASKJ outperform our estimates. While the longer-term market share concerns persist, we believe there is room for stock appreciation after this quarter's strong results. InfoSpace (INSP, Market Perform). INSP management team has executed well, driving revenue growth and expanding margins, despite competition in all three of its business units, especially search. While longer term market share in the search business is our primary concern, we believe the Company will likely produce upside to our estimates over the upcoming quarters. In addition, we note the Company has been awarded a preliminary judgment of nearly $250 mm in cash. If this judgment is upheld in court, it would provide a significant catalyst for the stock. Digital River (DRIV, Market Perform). DRIV continued to experience weakness, as investors sold volatility toward the end of the year. We expect the Company to report a solid quarter, with modest upside to our estimates, in its Q4 earnings call. Page 4 of 9

5 LookSmart (LOOK, Underperform). The outlook at LOOK still seems murky, as there are no identifiable catalysts to drive outperformance to our estimates. CNET Networks (CNET, Market Perform). After reporting Q3 revenues slightly below our estimates and toward the bottom end of its guidance range, CNET shares have not rebounded to post Q3 levels. While we believe the Company is well positioned for longer term growth, we are somewhat puzzled that the the Company has not seen a benefit from the overall ad recovery which now appears to be touching the tech sector as well. Homestore (HOMS, Market Perform). HOMS shares remain strong, as we believe investors are looking for cheap stocks (on an absolute basis) that could move significantly, like many dot.coms did in While we believe the potential for online real-estate advertising could prove huge, we need more visibility in the Company's ability to achieve profits, before we become more positive on the stock. GSI Commerce (GSIC, Underperform). We expect GSIC to report solid Q4 results, leveraging the strength of online commerce. In addition, we believe our estimates for the full year 2004 may prove to be a bit conservative after the Company announced its recent win with MLB. However, we believe this potential is fully reflected in the stock price. Jupitermedia (JUPM, Outperform). JUPM is leveraging the strength of its online media properties to drive accelerating revenue growth rates. In addition, we believe the Company is beginning to see synergies from its three complementary business units. Also, as we noted last week, the events business has been strong and will likely be beneficiary's of renewed interest in technology, as the recession has ended. We would be buyers of the stock as we expect JUPM will benefit from the secular recovery of online advertising. Digital Impact (DIGI, Market Perform). President Bush signed a federal anti-spam bill know as the "Can-Spam Act." While the near-term impacts to DIGI will be minimal, we believe this is a net positive and will help alleviate advertiser concerns regarding consumer perception of legitimate s. Page 5 of 9

6 Important Research Disclosures Distribution of Ratings/IB Services Firmwide and by Sector U.S. Bancorp Piper Jaffray Internet Media & Marketing Sector IB Serv./Past 12 Mos. IB Serv./Past 12 Mos. Rating Count Percent Count Percent Rating Count Percent Count Percent BUY [SB/OP] HOLD [MP] SELL [UP] BUY [SB/OP] HOLD [MP] SELL [UP] Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during the past three years. IB (Investment Banking) Serv./Past 12 Mos. shows the number of companies in each rating category from which U.S. Bancorp Piper Jaffray received compensation for investment banking services within the past 12 months. Legend: I: Initiation of Coverage D: Discontinuation of Coverage SB: Strong Buy OP: Outperform (prior to 12/12/01, OP stocks were rated "Buy") MP: Market Perform (prior to 12/12/01, MP stocks were rated "Neutral") UP: Underperform (prior to 12/12/01, UP stocks were rated "Sell") NA: Not Available UR: Under Review SUS: Suspended Rating Page 6 of 9

7 Important Research Disclosures Analyst Certification Safa Rashtchy, Senior Research Analyst The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Research Disclosures U.S. Bancorp Piper Jaffray was making a market in the securities of Amazon.com, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Amazon.com, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Ask Jeeves, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Ask Jeeves, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of CNET Networks, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from CNET Networks, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of DoubleClick, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from DoubleClick, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Digital Impact, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Digital Impact, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Digital River, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Digital River, Inc. within the past 12 months or Within the past 12 months, U.S. Bancorp Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the securities of Digital River, Inc. or the securities of an affiliate. U.S. Bancorp Piper Jaffray was making a market in the securities of ebay Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray was making a market in the securities of GSI Commerce, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from GSI Commerce, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Homestore, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Homestore, Inc. within the past 12 months or expects U.S. Bancorp Piper Jaffray was making a market in the securities of InterActiveCorp at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from InterActiveCorp within the past 12 months or expects U.S. Bancorp Piper Jaffray was making a market in the securities of InfoSpace, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from InfoSpace, Inc. within the past 12 months or expects U.S. Bancorp Piper Jaffray was making a market in the securities of Jupitermedia Corporation at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Jupitermedia Corporation within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of LookSmart, Ltd. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from LookSmart, Ltd. within the past 12 months or expects U.S. Bancorp Piper Jaffray was making a market in the securities of Netflix, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Netflix, Inc. within the past 12 months or expects to receive or intends to seek compensation within the next three months for investment banking services. U.S. Bancorp Piper Jaffray was making a market in the securities of NetEase.com, Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from NetEase.com, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of SINA Corporation at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from SINA Corporation within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Sohu.com Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Sohu.com Inc. within the past 12 months or expects U.S. Bancorp Piper Jaffray was making a market in the securities of United Online, Inc. at the time this research report was published. Page 7 of 9

8 U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from United Online, Inc. within the past 12 months or U.S. Bancorp Piper Jaffray was making a market in the securities of Yahoo! Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Yahoo! Inc. within the past 12 months or expects to receive or intends to seek compensation within the next three months for investment banking services. One or more affiliates of U.S. Bancorp, the ultimate parent company of U.S. Bancorp Piper Jaffray, provided commercial banking services (including, without limitation, loans) to Yahoo! Inc. at the time this research report was published. U.S. Bancorp Piper Jaffray was making a market in the securities of Microsoft Corporation at the time this research report was published. U.S. Bancorp Piper Jaffray has either received compensation for investment banking services from Microsoft Corporation within the past 12 months or One or more affiliates of U.S. Bancorp, the ultimate parent company of U.S. Bancorp Piper Jaffray, provided commercial banking services (including, without limitation, loans) to Microsoft Corporation at the time this research report was published. Rating Definitions Investment Opinion: Investment opinions are based on each stock's return potential relative to broader market indices*, not on an absolute return. Strong Buy (SB): Expected to outperform the relevant broader market index over the next 6 to 12 months. An identifiable catalyst is present to drive appreciation. Outperform (OP): Expected to outperform the relevant broader market index over the next 12 to 18 months. Market Perform (MP): Expected to perform in line with the relevant broader market index over the next 6 to 12 months. Underperform (UP): Expected to underperform the relevant broader market index over the next 6 to 12 months. * Russell 2000 and S&P 500 Volatility Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than the overall stock market. We are not recommending the "suitability" of a particular stock for an individual investor. Rather, it identifies the volatility of a particular stock. Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months. Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24 months. High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All IPO stocks automatically get this volatility rating for the first 12 months of trading. Page 8 of 9

9 Disclaimers Nondeposit investment products are not insured by the FDIC, are not deposits or other obligations of or guaranteed by U.S. Bank National Association or its affiliates, and involve investment risks, including possible loss of the principal amount invested. USBPJ research analysts receive compensation that is, in part, based on revenues of USBPJ Equity Capital Markets which include overall investment banking revenues. USBPJ research analysts who follow this Company report to the Head of Investment Research who, in turn, reports directly to the Chief Executive Officer of U.S. Bancorp Piper Jaffray. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. Officers or employees of affiliates of U.S. Bancorp Piper Jaffray, or members of their families, may have a beneficial interest in the Company's securities and may purchase or sell such positions in the open market or otherwise. Notice to customers in the United Kingdom: This report is a communication made in the United Kingdom by U.S. Bancorp Piper Jaffray to market counterparties or intermediate customers and is exclusively directed at such persons; it is not directed at private customers and any investment or services to which the communication may relate will not be available to private customers. In the United Kingdom, no persons other than a market counterparty or an intermediate customer should read or rely on any of the information in this communication. Securities products and services offered through U.S. Bancorp Piper Jaffray, member SIPC and NYSE, Inc., a subsidiary of U.S. Bancorp. Additional information is available upon request U.S. Bancorp Piper Jaffray, 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota Page 9 of 9