EQUITY RESEARCH. For Required Conflicts Disclosures, see Page 50.

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1 EQUITY RESEARCH December 16, US Internet Sector Outlook RBC Global Equity Team Click here for contributing analysts' contact information Is 2016 The Year Of The BAGEL? Going into 2015, our top 3 picks were AMZN, FB and NFLX. Turns out 2015 was the year of FANG, with Facebook, Amazon, Netflix and Google (FANG) rising an average 81%. While valuations today aren t nearly as compelling as they were going into 2015, we remain very positive on fundamental trends, view valuations as offering modest upside, and believe 2016 could be the year of the BAGEL: BABA, AMZN, GOOGL, EXPE & LNKD. Sticking With Our (Fundamental) Guns: With economic growth scarce, investors should favor secular growth ideas. And Large Cap Net has several of these: AMZN, BABA, EXPE, FB, GOOGL, LNKD, NFLX, PCLN. These companies are benefitting from extraordinarily large secular growth opportunities, massive scale, dramatic data competencies, deep competitive moats, significant strategic options & seasoned management teams which leads to consistent, premium top-line growth (20%+). Execution risk is falling, not rising. And some of these names have created enormous new market opportunities (AMZN with AWS), are on the verge of creating enormous new market opportunities (GOOGL with AV), or are soon to tap into very large new monetization veins (FB with Messaging, EXPE & PCLN with Alternative Accommodations, BABA with Mobile, LNKD with Engagement, and NFLX with International). Compelling stock prices? We don't think so. Compelling company fundamentals? We think so. Expect 17%+ Online Advertising & Retail Growth: We project 2016 Online Advertising Revenue of $189B (up 17%), Online Retail Revenue of $2.0T (up 22%), & Online Leisure Travel Sales of $534B (up 9%). 10 Key Net Growth Factors For 2016: (1) Mobile Materiality: Top trend, Mobile has now surpassed 25% of usage, revenue, bookings, etc. (Best derivatives: P, FB, TWTR, GOOGL, YELP, ZG). (2) Social Ubiquity: FB has more monthly users than China, and we re unlikely to hit a wall anytime soon (FB, TWTR, LNKD). (3) Online Migration Of TV Ad Budgets: Consumers continue to spend more time Online, and where consumers are, TV Ad Budgets will follow (GOOGL, FB). (4) Rise Of The Programmatic Ecosystem: We ve reached the tipping point from traditional media buying to Programmatic, which accounted for $18B of spend in 15 (GOOGL, CRTO, RUBI). (5) Same-day Delivery Surge: CPG sector remains in sight as companies like AMZN (with 8 th gen fulfillment centers) continue to shorten the driveway (AMZN). (6) Cloud Computing Critical Mass: A material revenue stream for several Nets, principally AMZN, but also perhaps GOOGL (AMZN, GOOGL). (7) Cash Pile Up And M&A Fever: As the large Nets have grown, so too have their cash (and equity) balances. This has led to both more acquisitions (WhatsApp, KING, AWAY) and more cash returned to investors (GOOGL, PCLN). (GOOGL, BABA, AMZN, YELP). (8) Unicorn Derivatives: Negative impacts include wage inflation, advertising cost pressures, and a general increase in competition. Positively, these (generally) well-funded companies are prolific advertisers and users of cloud services (FB & AMZN). (9) FX Headwinds & Tailwinds: Should the USD stabilize or weaken, this could create a tailwind in Largest International revenue exposure: PCLN, GOOGL, FB, EBAY, TRIP, EXPE, AMZN. & (10) Rise Of The Sharing Economy: We are seeing a major shift from the purchasing of media products (music, video, games) to the renting/streaming/sharing of those products (NFLX, P). Top Large Cap Longs For 2016: 1) GOOGL ($880 PT): Has the most identifiable catalyst in the sector its upcoming segment disclosure will likely highlight Core Google's profitability, lead to cost transparency & support robust SOP valuations. Lastly, GOOGL remains one of the best plays on the biggest Internet trends: Mobile, Video, IoT, etc. 2) AMZN ($775 PT): Revenue growth is accelerating, margins are expanding & the competitive moat is widening... Key drivers are Amazon Prime Flywheels (~50MM U.S. subscribers) and AWS s super-strong momentum - maybe the most powerful Tech trend today. & 3) LNKD ($300 PT): Each key segment has an identifiable 16 catalyst. Plus, LNKD faces a large $100B+ TAM and has robust revenue streams, with somewhat rare Margin expansion. EXPE & BABA are #4 & #5. Top Small Cap Longs: 1) CRTO ($59 PT); 2) YELP ($42 PT); & 3) SFLY ($52 PT). RUBI & TREE are #4 & #5. Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Required Conflicts Disclosures, see Page 50.

2 Table of Contents 2015 A FANG Good Year For Internet Stocks... 3 Net Sector Valuations: Large Caps At Robust Levels; Small Caps At A Discount Global Internet Demand Outlook Expect More Consistency Secular Unit Growth Trends Key Internet Growth Factors Mobile Materiality Continuing to Exploit the Mobile Gap-Up Opportunity Social Ubiquity Online Migration of TV Ad Budgets Rise of the Programmatic Ad Ecosystem Next-day/Same-day/Next-hour/Same-hour Delivery Surge Cloud Computing Critical Mass The Cash Pileup & M&A Fever Unicorn Derivatives Positive & Negative Currency Headwinds & Tailwinds The Rise Of The Sharing Economy Our Top Large Cap Longs for Our Top Small Cap Longs for Appendix 1: Companies Covered in this Report December 16,

3 2015 A FANG Good Year For Internet Stocks Although there was a reasonably broad dispersion of stock performances across the US Internet sector in 2015, the defining stock movement was material outperformance by the Large Cap Nets, especially Facebook, Amazon, Netflix and Google (FANG), which rose on average by 81%. In total, 11 of the Large Cap Net stocks outperformed the market in The Small Cap Net Sector, by contrast, pretty broadly underperformed the market, with 6 M&A deals (AOL, AWAY, OWW, KING, ZU, BRDR) providing almost all of the stock outperformance for the Small Cap Sector. 10 of the Small Cap Net Stocks declined 20%+ in 2015 ouch Large Cap Internet Stocks Outperformance 2015 was the year of FANG in the Large Cap Net space and no, we re not talking about vampires. We are of course talking about Facebook (up 31%), Amazon (up 106%), Netflix (up 144%) and Alphabet (AKA Google, up 41%), which each had a breakout year in On the whole, the Large Cap Net space materially outperformed the Small Cap Net companies, with an average 2015 return of 21% vs. the 11% decline seen amongst the Small Caps Nets that we cover. However, there were a few notable outliers among the Large Cap Nets who had a tougher year, including Twitter, Yahoo!, Alibaba, and Zillow. Additionally, the Large Cap Nets, which grew 21% on average and 13% at the median, also managed to outperform the market, with the S&P 500 down 2% over the year and the NASDSAQ up 4%. In total, 11 of our 15 Large Cap Nets managed to outperform the S&P 500 in 2015, vs. only 5 in The top three outperformers in the group were NFLX, AMZN, and EXPE, returning 98% on average and sharply contrasting with 2014, where NFLX and AMZN actually declined reversion to the mean anyone? The top three Large Cap Net underperformers in 2015 were YHOO, TWTR, and BABA. We have a repeat offender here, as TWTR was also our worst Large Cap performer in 2014, when it declined 44%. Comparing the Large Cap Nets stock performance vs. the S&P 500 and NASDAQ, we see that the Large Cap Internet space has significantly outperformed the market on both a 5-year basis (returning ~221% on average vs. the S&P s 60%) and a 3-year basis (returning 173% on average vs. the S&P s 41%). In terms of 5-year returns, every single one of our Large Caps that have been public for over five years has outperformed the market, EXPE (422%), NFLX (374%) and AMZN (256%) clearly stand out relative to the S&P s 60% return and the NASDAQ s 86% return. On a 3-year basis, NFLX (799% yes, you re reading that correctly), FB (284%) and ZG (195%) performed best relative to the S&P s 41% return and the NASDAQ s 63% return, while IACI (26%) and EBAY (30%) underperformed the market. At a high level, 10 of the 12 Large Cap Internet stocks that have traded for three years have outperformed the market. These performances continue to highlight how successful the Internet sector has been as an investment vehicle over the past several years relative to other segments of the market. December 16,

4 Exhibit 1: Price, Yearly Returns, and Market Cap of the Large Cap Internet Stocks Current Market 5-Year 3-Year 2015 Ticker Price Cap (MM) Return Return Return AMZN $ $300, % 155% 106% BABA $79.74 $200, % EBAY $27.97 $33, % 30% 18% EXPE $ $16, % 101% 44% FB $ $288, % 31% GOOGL $ $516, % 112% 41% IACI $59.67 $4, % 26% -2% KING $17.81 $5, % LNKD $ $30, % 0% NFLX $ $50, % 799% 144% PCLN $1, $65, % 107% 13% TRIP $82.48 $11, % 10% TWTR $24.84 $16, % YHOO $32.91 $31,079 98% 65% -35% ZG $25.49 $4, % -23% Average -- $105, % 173% 21% Median -- $31, % 104% 13% S&P 500 $2, % 41% -2% NASDAQ $4, % 63% 4% Source: RBC Capital Markets, Factset (Priced as of market close, December 11 th, 2015) Best 2015 Large Cap Outperformers NFLX, AMZN & EXPE NFLX (+144%) NFLX had a very strong year as the company continued to expand its global footprint, rapidly grew its US and, especially, International subscriber base, and raised prices to reflect the increasing value of its service. The company had several notable market launches (including Japan, Spain, and Italy) and saw its new Original Content (including Daredevil and Narcos) resonate with users. Furthermore, NFLX reported a series of strong quarters (with Q3 being slightly weaker) that highlighted in part the success the company is having in growing its user base internationally (which we ve also tracked in our quarterly surveys). The 2015 performance was a material turnaround from the 7% stock price decline the company experienced in AMZN (+106%) Following a weak 2014 where the stock declined 22%, AMZN had a very strong year, driven by several better than expected quarters, where the company managed to accelerate revenue growth across all three of its segments, while expanding its operating margins. The company s momentum is growing (as we highlighted in our September 11 th Flywheel Also Begins With F as we ve seen increased satisfaction and higher spend from users in our most recent consumer surveys. And, we can t forget AWS where we believe there is a compelling argument to be made that its growth and market dominance could be the most powerful trend in all of TMT. EXPE (+44%) EXPE s outperformance can be attributed to several factors, including very strong and accelerating Hotel Room Night growth, perceived fundamental outperformance vs. PCLN, and anticipated synergies in the wake of the Orbitz and HomeAway acquisitions. EXPE has been viewed correctly, we believe as an improving execution story against a very solid secular growth opportunity. Unlike NFLX and AMZN, EXPE s 2015 stock outperformance was an add-on to the strong 23% share price boost in December 16,

5 Biggest Large Cap Underperformers YHOO, TWTR, BABA YHOO (-35%) We have been waiting for a turnaround in Yahoo s core business for the past few years and this year s performance didn t give us much hope. New areas of growth in the form of Mavens revenue (Mobile, Video, Native, Social) so far isn t enough to offset the declines/deceleration in the core Search and Display businesses. Q2/Q3 saw material reductions in our YHOO estimates, though the stock continued to trade largely in relation to the performance of Alibaba s stock, which YHOO has a 15% stake in and which declined ~20% this year. This year markedly contrasts to the 25% stock appreciation seen in 2014, but 2014 s outperformance should be largely attributed to the BABA IPO. TWTR (-31%) 2015 saw a continued deterioration in TWTR s metrics and engagement trends. User metrics are showing almost no growth, while organic revenue growth has been decelerating rapidly (though still remaining intrinsically high). Furthermore, the company underwent major management changes with CEO Dick Costolo leaving and founder Jack Dorsey returning to take the helm (while he also leads Square), all the while reducing the workforce by roughly 8%. Additionally, our channel checks and proprietary surveys highlight potentially declining advertiser interest. No reversion to the mean here either, as 2015 followed a weak 2014, where the company s shares declined 44%. BABA (-23%) BABA s 2015 underperformance was driven by a relatively aggressive valuation setup at the beginning of the year, China macro concerns, lockup expirations post the company s IPO, and some concerns over relations between the company and the Chinese government. Another factor that pressured the stock was a faster-than-expected slowdown in GMV growth, especially on Desktop. Small Cap Underperformance Unlike their bigger brethren, Small Cap Nets had a tough time in Highlighting this, 14 of our 23 Small Cap Internet stocks had negative returns this year. Even more shocking to us was that 10 of the stocks dropped more than 20%. The top three outperformers in the group were TREE, ANGI, and GDDY, which returned 58% on average in On the negative side, there were more than a few standouts. However, the worst performers for the year were TRUE, QUOT and GRPN; each of which dropped more than 60%. We d note that there were also a material number of acquisitions across the Small Caps including AOL, OWW, ZU, BRDR, and AWAY (still to close). The stocks within our Small Cap Internet coverage exhibited a great deal more volatility in terms of their 5- and 3-year performances many haven t even been public for 5 years or 3 or 2! In terms of 5-year returns, only TREE (900%) and WWWW (166%) have outperformed the S&P (60%) or NASDAQ (86%), while MCHX (-57%), LQDT (-54%), NILE (-37%) and SFLY (26%) have significantly underperformed these indices. On a 3-year basis, five companies managed to outperform the S&P s 41% return: TREE (424%), AWAY (62%), YELP (57%), WEB (52%), and SFLY (47%). On the other side of the spectrum, eight companies underperformed the market with four declining: LQDT (-84%), GRPN (-39%), ANGI (-22%), and NILE (-7%). At a high level, four of the six Small-Cap Internet stocks that have traded for five years have materially underperformed the market. That s not a good batting average. And a majority of the Small Cap Internet stocks that have traded for three years have underperformed the market. Simply put, Small Cap Internet has been a minefield. December 16,

6 Exhibit 2: Price, Yearly Returns, and Market Cap of the Small Cap Internet Stocks Current Market 5-Year 3-Year 2015 Ticker Price Cap (MM) Return Return Return ANGI $9.38 $ % 51% AWAY $35.56 $3, % 19% CRTO $39.27 $2, % GDDY $33.58 $2, % GRPN $2.98 $1, % -64% GRUB $24.03 $2, % LQDT $6.41 $196-54% -84% -22% MCHX $4.13 $174-57% 0% -10% NILE $35.76 $412-37% -7% -1% P $12.61 $2, % -29% QUOT $6.33 $ % RATE $13.70 $1, % 10% RUBI $15.11 $ % SALE $9.91 $ % SFLY $43.86 $1,547 26% 47% 5% SSTK $31.58 $1, % -54% TREE $94.51 $1, % 424% 96% TRUE $7.86 $ % TRUP $8.21 $ % TUBE $12.36 $ % WIX $22.86 $ % WEB $22.47 $1, % 52% 18% YELP $29.65 $2, % -46% Average -- $ % 56% -11% Median -- $659-6% 21% -8% S&P 500 $2, % 41% -2% NASDAQ $4, % 63% 4% Source: RBC Capital Markets, Factset, (Priced as of market close, December 11 th, 2015) Best Small Cap Outperformers TREE, ANGI, GDDY TREE (+96%) Key factors behind TREE s dramatic 2015 stock performance have been a relatively modest valuation setup at the beginning of the year and dramatic growth acceleration in the company s Mortgage and Non-Mortgage Revenue segments, with growth in the Credit Card and Personal Loans verticals powering the latter. The company has also been able to generate an improving Variable Marketing Margin. LendingTree is demonstrating the ability to show sustainable premium revenue growth and diversification. ANGI (+51%) ANGI s shares have had a tumultuous year with almost all of the share s rise attributable to the past 2 3 months, following the addition of Scott Durchslag (previously President of Best Buy s Online & Global ecommerce) as CEO along with an activist shareholder pursuing a merger with IACI/HomeAdvisor. The company has faced pressure from activist investors to merge with IACI s HomeAdvisor and formally received an acquisition offer from IACI in November at approx. $9 per share also saw the departure of co-founder and CEO Bill Oesterle in April. ANGI s stock performance contrasts with 2014, where the stock declined 64% and was our second-worst performing Small Cap stock under coverage. GDDY (+27%) GoDaddy share price outperformance in 2015 was driven by very consistent Bookings and Revenue trends, along with a consistent expansion in the company s EBITDA margins. Basically, GDDY has proven out as a very consistent and solid execution story, December 16,

7 benefitting from a very large (14MM) subscriber base and potential for cross-selling and ARPU expansion. Biggest Small Cap Underperformers TRUE, QUOT, GRPN TRUE (-66%) TRUE shares were impacted by a series of major events over the course of 2015: the July loss of AutoNation as a customer, Q2 s negative EPS pre-announcement and 2015 guidance reduction, and management turnover with the resignation of CEO Scott Painter and departure of President John Krafcik (who left to help run the autonomous vehicle efforts at GOOGL). Despite the execution challenges, the company managed to post solid Q3 results and has recently appointed a new CEO, Chip Perry, leading to a slight recovery in shares off their lows. This year s performance follows a very strong 2014, where TRUE shares rose over 100%. QUOT (-64%) Formerly known as Coupons.com, Quotient posted consistently weak quarterly results and steadily lowered guidance over the course of the year. We think the successful rollout and ramp of Retailer IQ is critical to performance going forward as implementation delays have hurt results also saw the appointment of Internet industry veteran Jennifer Ceran as CFO. The company is now trading almost 80% below its March 2014 IPO price of $16. GRPN (-64%) GRPN shares have steadily declined over the course of 2015 following weak Q2/Q3 quarterly results and a 2016 outlook that was materially below Street expectations. GRPN remains in need of a lengthy turnaround with 2015 highlighting weakness across the company s key segments (including North America Local Billings) also saw the departure of Eric Lefkofsky as CEO (now Chairman), with former COO Rich Williams now at the helm of the company. This year follows a 30% decline in More M&A Than IPO 2015 was a very light year for Net IPOs, especially in contrast to 2014, where we had a host of new companies go public (incl. BABA and KING amongst several others). Amongst our coverage, the only IPO was GDDY. GoDaddy has risen 20% this year on the back of consistently solid quarterly results. Outside our coverage, there have been several IPOs, namely, SQ, ETSY, PYPL, and MTCH (a spin rather than an IPO). Notably, ETSY shares have declined almost 70% since its April IPO (-68% relative to the Nasdaq). At a broad level, 2015 was more about M&A deals than IPOs, in contrast to And we would anticipate 2016 to also be more about M&A than about IPOs. As a long-term guess, we would expect IPOs in the Internet sector to become significant again in December 16,

8 Exhibit 3: History And Forecast Of M&A and IPOs IPOs M&A ?????? 2017??? Source: RBC Capital Markets estimates; Note: 2016 and 2017 M&A/IPO predictions are conjecture. December 16,

9 Net Sector Valuations: Large Caps At Robust Levels; Small Caps At A Discount We have generally experienced a material re-rating in Large Cap Net stocks since the beginning of 2015 of the Large Cap Stocks, 7 have had an increase in their forward EV/EBITDA multiples since the beginning of 2015, with 6 seeing a 20%+ increase in their multiples. Further, 6 of the 15 Large Cap Nets are trading within 10% of their all-time highs. On a growth-adjusted basis, we still see some selectively reasonable valuations, though these aren t nearly as compelling as they were at the beginning of We would particularly point to EXPE, GOOGL, AMZN and FB along with TWTR as stocks that we think are reasonable on an EV/EBITDA/Growth basis. And in terms of Small Cap Nets, the valuation gap with Large Caps is at the highest level in at least two years. This is illustrated with the median Large Cap EV/Revenue multiple trading at 119% more than the Small Mid Cap median (versus a historical average of 68%), and a 70% Large Cap EV/EBITDA premium (versus a historical average of 28%). We looked at how the Large Cap Nets valuations had trended over the course of the year. From the results, we saw that 7 of the 15 stocks were trading at NTM EV/EBITDA multiples above what they had at the beginning of the year (including 6 trading more than 20%+ above levels at the beginning of the year) while 8 were trading at multiples lower than they had at the start of the year. Exhibit 4: Large Cap Internet Stocks Consensus Next Twelve Months High Low EV/EBITDA Valuation (January December 2015) 50x 45x 44x 40x 87x 38x 35x 30x 30x 33x 28x 29x 30x 29x 27x 25x 20x 15x 10x 5x 16x 20x 19x 10x 9x 10x 8x 20x 18x 13x 9x 8x 8x 4x 5x 15x 13x 17x 21x 18x 0x AMZN BABA EBAY EXPE FB GOOGL IACI KING LNKD NFLX PCLN TRIP TWTR YHOO ZG Beginning of '15 Current Source: RBC Capital Markets estimates, Company Reports, priced as of close, December 11 th, 2015 Not only are valuations higher, but many of our Large Cap Nets are trading close to all-time highs, with 5 out of 15 trading within 10% of their 52-week highs namely, AMZN, FB, GOOGL, KING, and NFLX (FANG strikes again!). On the downside, we can see that EBAY, TWTR, and ZG are all trading over 50% off of their 52-week highs. December 16,

10 Exhibit 5: How Far The Large Caps Are Off Of Their 52-week Highs 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% AMZN BABA EBAY EXPE FB GOOGL IACI KING LNKD NFLX PCLN TRIP TWTR YHOO ZG 0% -6% -6% -4% -10% -9% -15% -13% -12% -28% -29% -36% -53% -58% -80% Source: Factset, priced as of close, December 11 th, 2015 What s more, a majority of the Large Cap Nets stocks are trading at some of the highest forward EV/EBITDA multiples seen since 2012: 6 are trading within 10% of their NTM EV/EBITDA highs for the past four years: EXPE, GOOGL, KING, NFLX, PCLN, and YHOO. Not only that, but a majority of the Large Caps are above the median valuation they ve had for the past four years (with 8 above the median valuation and 7 below). We further note that FB is only trading about 19% below its four-year-high valuation level. For the 6 trading below their median valuations, only one is within 10% of its lows. If you guessed TWTR, you would be correct! We would note that the figure for YHOO may be skewed due to so much value tied to Asian assets (BABA and Yahoo! Japan). Exhibit 6: Large Cap Internet Stocks Consensus Next Twelve Months High Low EV/EBITDA Valuation (2012 Present) 120x 100x 80x 60x 40x 20x 0x AMZN BABA EBAY EXPE FB GOOGL IACI KING LNKD NFLX PCLN TRIP TWTR YHOO ZG Current Median Source: RBC Capital Markets estimates, Company Reports, priced as of close, December 11 th, 2015 December 16,

11 Exhibit 7: Growth Adjusted Valuations for the Large Cap Net Stocks Next, we look at valuations on a growth-adjusted basis. The takeaway: there are still some reasonable valuations, though they aren t quite as compelling as they were at the beginning of We would particularly point to EXPE, GOOGL, AMZN, and FB along with TWTR and ZG as stocks that are reasonable on an EV/EBITDA/Growth basis. At the other end of the spectrum, EBAY, TRIP, IACI, LNKD and PCLN look relatively expensive on an EV/EBITDA/Growth basis. Large Cap Internet Stocks Looking at the 14 Large Cap Internet stocks below, the key points are that the most attractive stocks on a growth-adjusted basis are: EXPE, TWTR, GOOGL, AMZN, and FB trading well below the sector median on an EV/EBITDA/G basis (0.51X). And the least attractive stocks on a growth adjusted basis are: EBAY, TRIP, IACI, LNKD and PCLN; while KING, NFLX, and YHOO have undefinable EV/EBITDA/G valuations due to negative growth. Price Market EPS 16E Price / EPS Growth 2016E EBITDA 16E EV / EBITDA Grth 2016E 12/11/2015 Cap 2016E Earnings '15E-16E P/E/G 2016E EBITDA '15E-16E EV/EBITDA/G AMZN $ $300,078 $ x 185% 0.33x $15, x 47% 0.43x BABA $79.74 $200,341 $ x 27% 0.93x $10, x 36% 0.53x EBAY $27.97 $33,576 $ x 6% 2.50x $3, x 5% 2.03x EXPE $ $16,002 $ x 53% 0.36x $1, x 33% 0.35x FB $ $288,842 $ x 39% 0.85x $15, x 40% 0.47x GOOGL $ $516,155 $ x 22% 0.95x $37, x 28% 0.42x IACI $59.67 $4,952 $ x -10% N/M $ x 10% 1.04x KING $17.81 $5,620 $ x -9% N/M $ x -5% N/M LNKD $ $30,062 $ x 28% 2.46x $1, x 38% 0.75x NFLX $ $50,656 $ x -28% N/M $ x -18% N/M PCLN $1, $65,168 $ x 21% 0.90x $4, x 20% 0.72x TRIP $82.48 $11,893 $ x 21% 1.56x $ x 16% 1.39x TWTR $24.84 $16,964 $ x 58% 0.75x $ x 46% 0.37x YHOO $32.91 $31,079 $ x 6% 8.56x $911 N/M -2% N/M ZG $25.49 $4,536 $ x 200% 0.48x $ x 61% 0.49x Median 32.8x 22% 0.92x 17.7x 28% 0.51x Source: RBC Capital Markets estimates, Company Reports, priced as of close, December 11 th, 2015 Unfortunately, the Small Cap Internet space has continued to underperform relative to the Large Cap space. In fact, the gap between Large and Small Cap valuations is at the highest level in the past two years. This is illustrated with the median Large Cap EV/Revenue multiple trading at 119% more than the Small Mid Cap median (versus a historical average of 68%), and a 70% Large Cap EV/EBITDA premium (versus a historical average of 28%). December 16,

12 Exhibit 8: Internet 2-year Forward Historical EV/Revenue (Top) and EV/EBITDA Valuations 6x 5x 4x 3x 5x 3x 5x 4x 5x 3x 5x 3x 4x 5x 4x 3x 2x 2x 4x 5x 2x 2x 2x 1x 0x 25x 20x 15x 10x 12/01/13 03/01/14 06/01/14 09/01/14 12/01/14 03/01/15 06/01/15 09/01/15 12/11/15 Large Cap SMID Cap Large Cap Premium 20x 19x 17x 17x 16x 17x 16x 16x 15x 15x 14x 13x 13x 12x 11x 11x 9x 8x 5x 0x -5x 12/01/13 03/01/14 06/01/14 09/01/14 12/01/14 03/01/15 06/01/15 09/01/15 12/11/15 Large Cap SMID Cap Large Cap Premium Source: RBC Capital Markets estimates, Company Reports, priced as of close, December 11 th, 2015 Small Cap Internet Stocks Looking at the Small Cap Internet stocks below, the key points are that the most attractive stocks we see on a growth-adjusted basis are: TRUE, WIX, QUOT, P, and YELP all trading below the sector median on an EV/EBITDA/G basis (0.37X). And, the least attractive stocks we see on a growth-adjusted basis are: NILE, GDDY, TREE, AWAY, and GRUB; while GRPN, LQDT, MCHX, RATE, TRUP, and TUBE have undefinable valuation on this basis due to negative growth or EBITDA. We would note that EV/EBITDA/G ratios for the Small Cap sector are lower than those for the Large Cap Net sector (on average), most likely reflecting greater uncertainty about the growth rates for the Small Cap companies and a lack of profitability, which excludes many from this analysis. December 16,

13 Exhibit 9: Growth Adjusted Valuations for the Small-Mid Cap Net Stocks Price Market EPS 16E Price / EPS Growth 2016E EBITDA 16E EV / EBITDA Grth 2016E 12/11/2015 Cap 2016E Earnings '15E-16E P/E/G 2016E EBITDA '15E-16E EV/EBITDA/G ANGI $9.38 $549 $ x 46% 0.43x $ x 41% 0.29x AWAY $35.56 $3,417 $ x 26% 1.88x $ x 27% 0.66x CRTO $39.27 $2,431 $ x 31% 1.04x $ x 39% 0.31x GDDY $33.58 $2,183 $ x 25% 0.93x $ x 22% 0.71x GRPN $2.98 $1,831 ($0.06) N/M N/M N/M $ x -54% N/M GRUB $24.03 $2,041 $ x 38% 1.14x $ x 26% 0.53x LQDT $6.41 $196 $0.02 N/A -92% N/M $9 7.0x -47% N/M MCHX $4.13 $174 $ x -18% N/M $12 5.3x -12% N/M NILE $35.76 $412 $ x 19% 1.40x $ x 12% 1.17x P $12.61 $2,677 $ x 119% 0.42x $ x 108% 0.20x QUOT $6.33 $527 $ x 203% 0.60x $ x 86% 0.17x RATE $13.70 $1,361 $ x 5% 3.76x $ x -11% N/M RUBI $15.11 $669 $ x 1% 28.33x $ x 19% 0.61x SALE $9.91 $519 $ x 12% 1.01x $76 4.4x 12% 0.37x SFLY $43.86 $1,547 $ x 314% 0.17x $ x 20% 0.39x SSTK $31.58 $1,140 $ x 27% 0.79x $ x 28% 0.30x TREE $94.51 $1,159 $ x 21% 1.40x $ x 31% 0.71x TRUE $7.86 $650 $ x N/M N/M $ x 195% 0.11x TRUP $8.21 $232 ($0.36) N/M N/M N/M ($3) N/M -75% N/M TUBE $12.36 $433 $ x N/M N/M $5 69.6x -714% N/M WIX $22.86 $907 ($0.49) N/M N/M N/M $ x 169% 0.13x WEB $22.47 $1,151 $ x 18% 0.42x $ x 10% 0.43x YELP $29.65 $2,238 $ x 126% 0.23x $ x 64% 0.24x Median 29.2x 26% 0.97x 12.9x 22% 0.37x Source: RBC Capital Markets estimates, Company Reports, priced as of close, December 11 th, 2015 December 16,

14 2016 Global Internet Demand Outlook Expect More Consistency Exhibit 10: Leading Internet Demand Indicators Source: RBC Capital Markets, Company Reports Demand growth trends among the leading Online Advertising (GOOGL & FB), Online Retail (AMZN), and Online Travel (EXPE & PCLN) names have been very consistent over the last three years. Great example GOOGL s organic Ad Revenue growth has remained between 16% and 21% Y/Y growth for 11 straight quarters. Our Sector Outlooks call for continued consistency, with Global Online Advertising expected to grow 17% in 2016 to $189B, Global Online Retail expected to grow 22% in 2016 to $2.0T, and Global Online Travel expected to grow 9% in 2016 to $534B. Leading Internet Demand Trends Have Been Very Consistent Online Advertising, Retail, and Travel growth rates exhibited clear consistency and even acceleration in several cases. This is based on the Y/Y organic revenue growth levels of Google and Facebook (Online Advertising), Amazon and ebay (Online Retail), and Expedia and Priceline (Online Travel). For example, Google s organic Advertising revenue growth has veered between 16% and 19% for 10 straight quarters but accelerated 4pts to 21% Y/Y in Q3:15, while Facebook s growth rate has also been very consistent, when accounting for comps and FX, with 55% 58% Y/Y growth for the past four quarters. Likewise, while Amazon s organic Retail revenue growth has careened between 17% and 24% for 10 straight quarters, it hit a three-year high of 27% Y/Y growth in Q3:15. Internet Travel leaders Expedia and Priceline have also been able to sustain relatively consistent growth rates over the past three years, with Expedia in particular able to sustain 23% to 30% Y/Y growth rates over the past seven quarters. Says a lot about the secular growth nature of the Internet. And says a lot about the execution of the leading Internet companies. Online Advertising Y/Y Growth Q1:13A Q2:13A Q3:13A Q4:13A Q1:14A Q2:14A Q3:14A Q4:14A Q1:15A Q2:15A Q3:15A Google Ad Revenue (ex-fx, hedging) 19% 18% 18% 19% 18% 18% 16% 18% 16% 17% 21% Facebook Advertising Revenue (ex-fx) 43% 63% 66% 77% 83% 65% 63% 58% 55% 55% 57% Online Retail Y/Y Growth Q1:13A Q2:13A Q3:13A Q4:13A Q1:14A Q2:14A Q3:14A Q4:14A Q1:15A Q2:15A Q3:15A Amazon Retail Sales (ex-fx) 23% 24% 25% 20% 21% 21% 19% 17% 20% 24% 27% ebay Global GMV (ex-fx) 13% 13% 13% 11% 11% 9% 7% 5% 5% 6% 6% Online Travel Y/Y Growth Q1:13A Q2:13A Q3:13A Q4:13A Q1:14A Q2:14A Q3:14A Q4:14A Q1:15A Q2:15A Q3:15A Priceline Global Bookings (ex-fx) 37% 38% 37% 39% 35% 33% 29% 23% 25% 26% 22% Expedia Global Bookings (ex-fx) 16% 13% 15% 21% 29% 29% 30% 27% 24% 23% 28% RBC s Global Internet Sector Outlooks Below we provide our fundamental outlook for the Global Internet Sector for 2016, which details our forecasts for Global Online Advertising, Online Retail, and Online Travel, the three principal revenue streams for the Internet sector. Our headline takeaways are that we anticipate Global Online Advertising to reach $189B in 2016 (up 17% Y/Y), Global Online Retail spend to reach $2.0T (up 22% Y/Y), and Global Online Leisure Travel to reach $534B (up 9% Y/Y). Global Online Advertising Consistent Mid- to High-Teens Growth in 2016 For 2016, we expect that Global Online Advertising will reach nearly $189B, growing 17% Y/Y and accounting for 36% of total Global Advertising. December 16,

15 For 2016, we are modeling a 5% increase in total Global Advertising and ~390bps of increased Online penetration. We think that SoLoMoVo continues to be a major driver of Online Advertising growth (that s Social, Local, Mobile, and Video) as well as the migration of major TV advertising budgets to Online channels. Mobile has become especially powerful as a growth factor, now that it has reached a point of significant materiality (i.e., 30%+ channel) for major Internet companies. Our outlook calls for $189B of Global Online spend in 2016, up 17% Y/Y, and accounting for 36% of total Global Advertising. Exhibit 11: RBCCM Global Online Advertising Forecast ($ in B) 2014A 2015E 2016E 2017E 2018E Total Global Advertising $488 $503 $526 $544 $569 Y/Y Change 5% 3% 5% 3% 5% Global Online Advertising $136 $161 $189 $219 $251 Y/Y Change 18% 18% 17% 16% 15% Internet as % of Total 28% 32% 36% 40% 44% Y/Y Incr. in Penetration (bps) Source: RBC Capital Markets estimates, Magna Global Three factors continue to give us confidence in Online Advertising s secular growth potential: (1) The increasing materiality of Mobile devices, which garner a disproportionate share of time spent compared to their share of Online Advertising dollars though initiatives like Google s Enhanced Campaigns and the growth of Facebook and Twitter advertising have been changing this; (2) The migration of TV ad budgets (the biggest Offline ad spend category) onto the Internet especially given the rise of Internet Video platforms like YouTube and Facebook (Magna Global forecasts Online ad spend to surpass TV in the US in 2016 and Globally in 2017); and (3) The still significant gap between the amount of time spent Online (or on Mobile) and the amount of ad spend dedicated to this format (creating a gap-up opportunity). Two additional secular trends worth highlighting in the advertising space are Programmatic and content/native advertising. These innovative secular trends could contribute significantly to the growth of Internet Advertising going forward. For Programmatic alone, Magna Global predicts that spend could grow to $37B by 2019, up from $14B in 2015 this would make Programmatic roughly one-third of total global Online Display and Video ad spend this year and nearly 50% of that spend in We think that these trends will continue as advertisers get more and more comfortable with using big data analysis and machine-learning software to enable their ad buying decisions. Potential Upside Forecast Factors There may be upside to our projection for Online Advertising growth if we see material macroeconomic outperformance. Faster-thanexpected adoption of Mobile advertising or faster-than-expected adoption of Video ad formats (as better campaign buying/measurement and Nielsen ratings encourage TV ad budgets to transition online) would also provide material upside to our forecasts. Potential Downside Forecast Factors Conversely, deterioration in the global macro environment could cause underperformance in Online advertising vs. our expectations. Also, persistently lower ad rates on SmartPhones could cause a drag as users spend more time on Mobile devices. Finally, the rise of Programmatic ad buying may push down prices in the near term. December 16,

16 Global Online Retail 20%+ Growth in 2016 For 2016, we expect that Global Online Retail spend will reach roughly $2.0T, growing 22% Y/Y and accounting for 9% of total Global Retail spend, with likely low-double-digit penetration in the US, China, and other leading Online Retail markets. For 2016, we are modeling a 3% Y/Y increase in Global Retail spend and ~133bps of increased Online penetration. We think that the continued expedition of delivery times (including same-day delivery) and the incremental impact of Mobile devices will continue to be drivers in We are forecasting Global Online Retail spend of $2.0T in 2016, up 22% Y/Y and accounting for 9% of total Global Retail spend. Exhibit 12: RBCCM Global Online Retail Forecast ($ in B) 2014A 2015E 2016E 2017E 2018E Global Retail $21,525 $22,882 $23,683 $24,441 $25,174 Y/Y Change 6.1% 6.3% 3.5% 3.2% 3.0% Global Online Retail Sales $1,343 $1,672 $2,046 $2,455 $2,896 Y/Y Change 26% 24% 22% 20% 18% Online As % of Global Retail 6% 7% 9% 10% 12% Y/Y Incr. in Penetration (bps) Source: RBC Capital Markets estimates, emarketer We highlight several factors that give us confidence in the continued penetration of Online Retail: (1) Still intrinsically low penetration rates (under 10% of total Retail spend); (2) The move of physical stores to embrace Online channels; (3) The opportunity for incremental sales created by Mobile devices; (4) The move to establish same-day fulfillment and even same-hour fulfillment by companies such as Amazon, which expands the categories of products that can be sold Online (especially, CPG); & (5) the emergence of vertically-focused ecommerce vendors (i.e., Wayfair, Houzz) and subscription ecommerce. Potential Upside Forecast Factors Aside from material macroeconomic outperformance, the key factors that would drive upside in Online Retail are faster-than-expected international adoption of the Online retail channel (especially in developing economies) and further expansion into categories not yet fully serviced by Online e-commerce channels, such as consumer staples. Potential Downside Forecast Factors Aside from material macroeconomic underperformance, the key factors that would drive downside in Online Retail are the potential broader imposition of Online sales taxes in the US and other markets and a slowdown in the international adoption of the Online Retail channel. Global Online Travel 9% Growth in 2016 For 2016, we expect Global Online Travel Sales to reach $534B, growing 9% Y/Y and accounting for 38% of total Global Travel spend. This penetration rate is further expansion into categories not yet fully serviced by Online ecommerce channels, such as consumer staples. materially higher than for either Advertising or Retail as Travel was one of the earliest categories to migrate Online. For 2016, we are forecasting a 5% increase in total Global Travel Sales and 130bps of increased Online penetration. December 16,

17 Exhibit 13: RBCCM Global Online Travel Forecast ($ in B) 2014E 2015E 2016E 2017E 2018E Global Total Travel Sales $1,256 $1,330 $1,399 $1,469 $1,535 Y/Y Change 5% 6% 5% 5% 5% Global Online Travel Sales $444 $490 $534 $576 $622 Y/Y Change 11% 10% 9% 8% 8% Online as % of Total 35% 37% 38% 39% 41% Y/Y Incr. in Penetration (bps) Source: RBC Capital Markets estimates, PhoCusWright There are at least three factors which give us confidence in continued Online Travel penetration: (1) The burgeoning middle class in emerging markets; (2) The rising popularity of metasearch properties, which we believe signals there is still room to meaningfully improve and streamline the Online booking process; and (3) The incremental opportunity posed by Mobile devices, especially in the largely incremental last-minute booking category. Potential Upside Forecast Factors A better-than-expected macroeconomic situation or a greater contribution from Mobile devices could both provide material upside to our Global Online Travel estimates. Potential Downside Forecast Factors Online Travel could underperform our projections due to lower-than-expected GDP growth outcomes and less robust adoption of Mobile bookings. December 16,

18 Y/Y Growth 2016 US Internet Sector Outlook Secular Unit Growth Trends Turning to unit growth trends, we can see that unit growth trends remain selectively robust at 20%+ for BABA, YELP, NFLX, LNKD, EXPE, PCLN, AMZN and we ll sneak in GOOGL. In addition, it remains valuable to highlight the high unit growth rates amongst the various companies under our coverage in Looking at the below, we can see that though unit growth rates have naturally decelerated, they remain largely robust across both our Large and Small cap companies, with a few exceptions. A solid number of our Net companies (including giants such as BABA, NFLX, LNKD, EXPE, PCLN, and AMZN though GOOGL s also close) have been able to post +20% Y/Y growth in their key metrics. Exhibit 14: Unit Growth At A Sampling Of Internet Companies, 2015E 50% 45% 46% 40% 35% 32% 30% 29% 28% 28% 25% 24% 24% 23% 20% 19% 19% 18% 15% 10% 13% 13% 10% 5% 0% Source: RBC Capital Markets estimates, Company Reports Our quick scrub of the S&P 500 shows that only three companies have maintained roughly 20% or more revenue growth for the last 23 quarters or more from a $10B+ run rate: GOOGL, AMZN, and PCLN (calculated using Gross Bookings). We ve published this before and have invited readers to correct us. Hasn t happened yet. It is worth mentioning that GOOGL and AMZN did fall slightly under these numbers in late 2014/early 2015, but nevertheless, the overall growth trend remains impressive given the size of these companies. There may be something to this Internet thing. December 16,

19 Exhibit 15: S&P 500 Companies with 19 Quarters of ~20%+ Top-Line Growth 60% 50% 40% Y/Y Growth 30% 20% 10% 0% Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12 Q1:13 Q2:13 Q3:13 Q4:13 Q1:14 Q2:14 Q3:14 Q4:14 Q1:15 Q2:15 Q3:15 GOOGL (Organic Revenue) AMZN (Organic Revenue) PCLN (Organic Bookings) Source: RBC Capital Markets estimates, Company Reports December 16,

20 2016 Key Internet Growth Factors Exhibit 16: Significant Q3:15 Mobile Datapoints Below we highlight 10 key Internet growth factors for Several of these have been key trends for several years Mobile Materiality, Social Ubiquity, Migration of TV Ad Budgets, Rise Of Programmatic Advertising while we are calling out others for the first time Currency Headwinds & Tailwinds and Unicorn Derivatives. They should all be key drivers of growth in 2016 and create differentiation between companies that can manage them and those that cannot. In the following sections, we will give a brief overview of each of the growth factors and which Internet stocks we think are the best derivative plays off each trend. 1. Mobile Materiality Continuing to Exploit the Mobile Gap-Up Opportunity Though we ve stressed its importance before, Mobile remains the most important growth factor for the space into 2016 as the world continues to transition to away from Desktop computers, and companies/advertisers increasingly adopt Mobile devices as a platform. For most of the major Internet companies, Mobile as a channel has now surpassed 25% of traffic, usage, revenue, bookings, etc. We continue to view the rise of this channel as an overall positive growth factor for Internet companies in that it removes friction between consumers and Internet services/applications/etc. Although companies disclosure of Mobile materiality is not consistent across Internet companies, we put together some of the most important datapoints from the companies we see as Mobile leaders. Advertising models are leading the way. In terms of Mobile revenue generation (likely the most important Mobile statistic) Pandora, Twitter, and Facebook each generated 75% or more of their Ad revenue in Q3:15 from Mobile devices. We give honorable mentions for Zillow, which is seeing more than two-thirds of its visits on Mobile devices and Yelp with over 70% of Searches done on Mobile (most of which are in-app). The most impressive Mobile stat from non-advertising business models was EBAY s Mobile GMV (42% of its total). 100% 90% 80% 70% 60% 50% 40% 30% Ad Revenue 86% MAUs 80% Ad Revenue 78% Searches 71% Visits 66% Traffic 55% Traffic 50% GMV 42% Mobile Searches with Deep-App 40% 20% 10% 0% P TWTR FB YELP ZG LNKD TRIP EBAY GOOG Source: RBC Capital Markets, Company reports Mobile s importance has grown significantly over the last several years, and in the US the amount of time spent Online on Mobile devices is more than 60% (and growing!). US December 16,

21 Internet users are spending the greatest proportion of time in Apps (53% for SmartPhone + Tablet), but just 8% of their time in Mobile browsers. Meanwhile, Desktop accounts for 39% of a US Internet User s time. Exhibit 17: Percentage of Time Spent Online in the US by Device (March 2015) Smartphone (Browser) 6% Tablet (Browser) 2% Tablet (App) 10% Desktop 39% Smartphone (App) 43% Source: comscore, RBC Capital Markets In terms of growth, Mobile devices constituted more than 90% of the growth in minutes spent Online in the US in each of the last three years. This is clearly drawing the attention of advertisers. Exhibit 18: Additional Minutes Spent Online in the US by Device (Billions of Minutes) 1,600 1,400 1, , June 2013 June 2014 June 2015 Desktop Mobile App Mobile Browser Source: comscore, RBC Capital Markets However, the material datapoints we list above notwithstanding, the percentage of time spent on Mobile devices is far greater than the percentage of ad spend dedicated to Mobile. According to emarketer, 24% of time spent with media is expected to be on Mobile in 2015, while only 12% of Ad budgets are spent on Mobile, according to Magna Global. Advertisers December 16,

22 might actually be (very slightly) over-indexing toward Desktop Internet, which gets 24% of ad spend but only 23% of media time spend, but the biggest over-indexing is with Print and TV. We think this disconnect provides an opportunity for continued substantial growth in Mobile advertising. Exhibit 19: Advertising Spend vs. Time Spend 45% 40% 35% 35% 38% 30% 25% 23% 24% 24% 20% 15% 10% 5% 12% 12% 9% 14% 3% 3% 4% 0% Desktop Mobile TV Radio Print Other Time Spent Ad Dollars Spent Source: emarketer, RBC Capital Markets, Magna Global Derivative Plays In terms of monetizing Mobile usage, P, TWTR, and FB are the clear leaders with, with 75% or more of their primary revenue line coming from Mobile. Other honorable mentions include GOOGL, YELP, Z and EBAY because of their high levels of Mobile usage. MCHX s call-based advertising is also a beneficiary of increased SmartPhone usage. There are also some companies that will be more challenged than benefitted by the trend toward Mobile. 2. Social Ubiquity One Internet trend that isn t leaving us anytime soon is the rise of social platforms. Facebook alone has ~1.5B unique users on a monthly basis (including 1.4B on Mobile, but excluding Instagram & WhatsApp). This is about 21% of the world s population (larger than China!). December 16,

23 Million MAU 2016 US Internet Sector Outlook Exhibit 20: Facebook MAU (1.5B FB MAUs vs. 1.4B People in China) >! (Translation: WOW!) Source: Company reports, RBC Capital Markets What s more, growth rates at Facebook have actually accelerated in Q3 (and on a flat comp). Facebook grew MAUs at 14% Y/Y in Q3:15. We believe this continued strong growth rate implies core Facebook is far from its limit in terms of user base growth. And what if Facebook was actually allowed to extend its service within China itself?! Further, we note that this does not include Facebook s massive user base in WhatsApp (900MM MAUs) and Instagram (400MM MAUs), though there is likely meaningful overlap among the platforms. Exhibit 21: Facebook MAU 1,800 40% 1,600 1,400 1,200 1, ,110 32% 1,155 1,188 29% 18% 1,227 16% 1,276 15% 1,441 1,491 1,317 1,351 1,394 14% 14% 14% 13% 13% 1,546 14% 35% 30% 25% 20% 15% 10% Y/Y Growth 200 5% 0 Q1:13 Q2:13 Q3:13 Q4:13 Q1:14 Q2:14 Q3:14 Q4:14 Q1:15 Q2:15 Q3:15 Monthly Active Users Y/Y Growth 0% Source: Company reports, RBC Capital Markets Twitter, on the other hand, has possibly hit a growth wall, with Q3:15 MAUs only increasing 11% Y/Y, a 4pt decrease from Q2 on a 2pt easier comp #uh-oh. December 16,

24 Exhibit 22: Twitter MAU Million MAU % % % 30% % 26% % 21% % % 11% 60% 50% 40% 30% 20% 50 10% 0 Q1:13A Q2:13A Q3:13A Q4:13A Q1:14A Q2:14A Q3:14A Q4:14A Q1:15A Q2:15A Q3:15A Monthly Active Users Y/Y Growth 0% Source: Company reports, RBC Capital Markets The rise of Social Networks provides a compelling opportunity for advertisers. First, the huge amount of time users are spending on these Social Networks (sometimes even while they are using other media sometimes while they are working sometimes when they are supposed to be working ) means that advertisers must compete to capture consumer s attention on traditional media. For instance, Facebook nightly has an audience larger than most primetime networks. Second, the everyday usage of Facebook and Twitter (as well as the privately owned networks like Snapchat) creates a huge amount of data about how people connect to friends, places, businesses, products, and news, which is all useful for ad targeting. What s more, both Twitter and Facebook appear to have cracked the code on Native Mobile advertising by utilizing feeds of bite-sized news stories interspersed with other media. As of Q3:15, Facebook received 78% of its ad revenue from Mobile, while Twitter received 86%. It does not appear that this trend is going away anytime soon. In recent surveys of Twitter and Facebook advertisers we conducted with Ad Age (see our October 1 Note), 53% of Google, 61% of Facebook, 35% of Twitter and 43% of YouTube advertisers expect to increase their ad spend on these platforms over the next year. On the flipside, the percentage of advertisers looking to decrease their spend on these networks ranges from 5 10%. These are positive indicators for all four platforms. December 16,

25 Exhibit 23: Over the next year, I expect my advertising budget to: 70% 60% 53% 61% 56% 53% 50% 40% 35% 43% 39% 32% 30% 20% 10% 8% 7% 9% 5% 0% Increase Decrease Stay the Same Google Facebook Twitter YouTube Source: Ad Age, n=522, 498, 504 & 488 for Google, Facebook, Twitter & YouTube, respectively Consumer interest seems to be holding up as well. With so many users on the site, we might have expected incremental users to be less engaged, but Facebook s engagement metrics (DAU/MAU) have held up, with FB engagement trending upwards. Twitter, however, has stopped disclosing its engagement trends but has indicated slight decreases from a year ago. Exhibit 24: FB Engagement (Daily Active Users/Monthly Active Users) Geographic Breakdown 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 70% 70% 70% 70% 71% 72% 72% 73% 74% 75% 75% 75% 76.7% 77.0% 77.0% 64% 63% 63% 65% 67% 67% 68% 69% 70% 71% 72% 72% 73.3% 73.3% 74.0% 61.8% 62.0% 56% 57% 57% 59% 61% 62.6% 59% 60% 55% 51% 52% 53% 53% 51% 51% 51% 51% 52% 53% 54% 54% 55% 57% 56% 56% 57.3% 57.5% 57.5% Q1:12 Q2:12 Q3:12 Q4:12 Q1:13 Q2:13 Q3:13 Q4:13 Q1:14 Q2:14 Q3:14 Q4:14 Q1:15 Q2:15 Q3:15 US & Canada Europe Asia Rest of World Source: Company reports, RBC Capital Markets Furthermore, within the importance of Social Ubiquity we d note the impressive growth of Messaging as a platform. Messaging services have grown materially globally, but their impressive monetization has been especially notable in Asia, where apps such as LINE, Kakao, WeChat and Weibo have become platforms for a host of services. From our work, we believe these services are generating annual revenue per MAU in the range of $1.50 $ Some of the ways to monetize messaging include advertisements, subscription pricing, inapp/game purchases, payment capabilities, stickers (essentially emojis you can purchase) and wallpapers. Similarly, at Facebook s F8 developer conference in March, the company December 16,

26 Exhibit 25: 2012/2015E Global Ad Spend announced the launch of the Facebook Messenger Platform. Essentially, Facebook took an asset that has become a broad communications tool for over 600MM people and opened it up to developers. In addition to app integration and video capabilities, payments and ecommerce functionality are also enabled within the platform. We also view Snapchat as having the ability to be a material player in this space. Derivative Plays FB especially, but also TWTR, are the obvious positive derivatives off of this trend. LNKD is also a candidate. More interestingly, this trend likely has negative implications for other large advertising properties such as YHOO and IACI, which are experiencing a rising alternative to their users and advertisers attentions. 3. Online Migration of TV Ad Budgets The looming possibility of the migration of TV Ad Budgets to Online forms of Advertising remains a key catalyst that is consistently top-of-mind with almost all the ad-tech firms, especially the video related ones. With consumers spending a greater percentage of their time Online, especially on Mobile devices, we think that other media channels can become sources of funding for Internet advertising. The largest of these sources is the nearly $200B global market for TV advertising, which was roughly 2x the size of Internet ad spend in 2012 (though that gap is expected to close to just 1.2x this year). We think that the ability to not only match the TV ad budget, but beat it, is the opportunity in front of Internet Advertising. In fact, Magna Global estimates that these budgets will be roughly similar in 2017 on a global basis, and be roughly similar in the US next year. Talk about cutting the cord E Out of Home Radio 7% 7% Out of Home Radio 7% 6% Print 24% TV 40% Print 17% TV 38% Digital 22% Digital 32% Source: Magna Global,RBC Capital Markets In fact, to see the significant switch occurring, one simply needs to compare the difference between Global Internet Advertising spend between 2012 and 2015 also of note is the shrink of Print advertising. American consumers are spending a greater percentage of their media time Online and not as much watching TV. According to emarketer, TV has gone from 41% of US adult media time spent in 2010 to just 35% in Over the same time period, Mobile has gone from 4% of time spent to 23%. Keep in mind that in this methodology multitasking counts double, so some of this new Mobile time may be also spent in front of the TV. Mobile has taken a small share from Desktop Internet time as well, but on a combined basis, they have risen from 26% of time spent in 2010 to 44% in 2015, higher than the share of TV. It stands to reason that December 16,

27 the large budgets currently dedicated to TV advertising will make their way into the digital ad ecosystem. Though we admit, this is hardly a novel hypothesis. Exhibit 26: Total Media Time Spent by US Adults % 8% 5% 6% 14% 4% 5% 13% 3% 4% 3% 4% 4% 3% 12% 12% 12% Minutes/Day % 41% 4% 4% 40% 4% 7% 39% 4% 13% 37% 37% 35% 5% 3% 3% 19% 21% 24% % 23% 21% 19% 20% 20% Other Print Radio TV Other Digital Mobile (nonvoice) Online Source: emarketer, RBC Capital Markets Part of the stickiness of TV budgets can be explained by the fact that video is a very engaging and therefore very valuable ad format. Online Video Ads get multiple times higher CPMs than Display ads, all else equal. However, we have some evidence that video viewing is moving Online as well. Nielsen s December Total Audience Report also highlights some unique data regarding consumer time expenditure. As seen in the below exhibit, there is a clear shift from Live TV and Radio to SmartPhone/Mobile time (though these results seem somewhat TV heavy and Internet light). December 16,

28 Exhibit 27: Average Time Spent per Adult 18+ Per Day 600 Minutes/Day Q2:13 Q2:14 Q2:15 Other Mobile Internet Desktop Internet AM/FM Radio DVR / Time-Shifted TV Live TV Source: Nielsen, RBC Capital Markets Derivative Plays GOOGL is likely one of the biggest beneficiaries due to its YouTube asset. FB and TWTR both have the potential to become part of a TV-Online ad ecosystem as TV becomes a more socially-connected medium (see TWTR Amplify and last year s introduction of auto-play video ads on Facebook). NFLX and AMZN are beneficiaries of the shift to Online video viewing. YHOO also benefits because of its acquisition of Brightroll, a digital video adtech company. TUBE is undoubtedly one of the biggest small cap beneficiaries as a video adtech company with technological capabilities that allow TV buyers to plan, buy, and measure digital video exactly the way they do their TV buys. SSTK is a small cap derivative due to its collection of licensed video clips. 4. Rise of the Programmatic Ad Ecosystem Not just a buzzword anymore, Programmatic has become a full-fledged advertising force, with large global advertisers switching more and more of their dollars towards this new, data- and analytics-based approach to advertising. Though initially restricted to the realm of Display advertising, Programmatic ad buying methods (which include real-time bidding and automated buying) are now being applied to mobile, online video, and even traditional TV. Traditional ad buying/selling has been ripe for disintermediation for quite some time and we think Programmatic, with its distinct benefits/capabilities, is only going to expand its presence in the ad world. We think the advertising industry s decades-long shift from traditional media (newspaper, magazines, radio, and TV) to new media (Desktop, Mobile, and Social) has reached a tipping point over the past ~2 years due to three primary factors: (1) Consumer usage has rapidly shifted to multiple screens; (2) Technology has adapted as well, both from a cost and feasibility standpoint due to the evolution of cloud computing, big data analysis, and machine-learning software to enable real-time and targeted decisions; & (3) Advertisers have finally decided to follow, as the initial proof of concept phase associated with selling remnant or low-value inventory appears to have passed, and now, we see incremental evidence of premium or high-value inventory flowing through Programmatic channels. December 16,

29 Exhibit 28: Growing Penetration of Programmatic Advertising Programmatic Advertising Spend ($18B) Online Display Ad Spend ($46B) Real-Time Bidding Ad Spend ($7B) Programmatic Advertising Spend ($38B) Online Display Ad Spend ($72B) Real-Time Bidding Ad Spend ($21B) Online Ad Spend ($136B) Online Ad Spend ($189B) Global Ad Spend ($488B) 2014A Global Ad Spend ($544B) 2017E Source: Magna Global, IDC, IAB, RBC Capital Markets Magna Global predicts that Programmatic buying for display, social, and video campaigns will reach $18.4B this year, of which $9.8B will in the US alone. By 2017, Magna predicts it could reach $38B globally, with $17B in the US. Real-time Bidding (RTB) will constitute a significant portion of this spend, as advertisers continue to automate their ad spend. There also remains a large international opportunity for the expansion of Programmatic advertising. Additionally, in September, RBC Capital Markets conducted a survey of more than 1,000 advertising professionals in conjunction with Ad Age to gauge overall industry sentiment towards Online marketing tools, with a specific focus on Google (including YouTube), Facebook, Twitter, and Programmatic Advertising. Takeaways included that marketers continue to expect to increase Programmatic Advertising budgets. In our September 15 survey, 68% of respondents indicated that they planned to Significantly increase or Modestly increase the percentage of budget allocated to Programmatic vs. 62% in our February 15 survey. Furthermore, only 4% of respondents indicated that they would Modestly decrease or Significantly decrease allocations, though this is an increase from the 2% result in February. Furthermore, more respondents indicated that they would Significantly increase their spend on Programmatic (23% of respondents) than they would on Youtube (6%), Facebook (14%) or Twitter (5%). The key takeaway remains that Programmatic Advertising is likely becoming a required part of marketing budgets. December 16,

30 Exhibit 29: Over the next year I expect my advertising budget to: September 2015 Percentage of Respondents 60% 50% 40% 30% 20% 10% 0% 53% 56% 44% 46% 36% 29% 32% 30% 23% 3% 14% 6% 7% 5% 3% 5% 1% 1% 2% 2% Programmatic Youtube Facebook Twitter Significantly increase Modestly increase Stay the same Modestly decrease Significantly decrease February % Percentage of Respondents 50% 40% 30% 20% 10% 0% 22% 40% 36% 45% 46% 46% 41% 34% 34% 17% 16% 8% 2% 3% 3% 4% 0% 2% 1% 1% Programmatic Youtube Facebook Twitter Significantly increase Modestly increase Stay the same Modestly decrease Significantly decrease Source: AdAge; For September 2015, n=256, 485, 405, & 500 for Programmatic, Youtube, Facebook and Twitter, respectively. For February 2015, n=359, 306, 522, & 446 for Programmatic, Youtube, Facebook and Twitter, respectively. Note we didn t include Google because we did not have February survey data on it. Using the data above, we also looked at the difference between the number of marketers who are looking to increase and the number who want to decrease their spend on the various platforms. The results are below, which clearly illustrate Facebook as the pack leader, with Twitter lagging its peers. And, more importantly, a greater proportion of marketers expect to increase their allocation to Programmatic Ad channels as compared to leading Online ad platforms. December 16,

31 Exhibit 30: Over the next year, I expect my advertising budget with Programmatic, Google, Facebook, Twitter & YouTube to (below is the % who plan to increase minus the % who plan to decrease): 70% 63% 60% 54% 50% 45% 40% 38% 30% 25% 20% 10% 0% Programmatic Facebook Google YouTube Twitter Source: Ad Age, n=256, 522, 498, 504 & 488 for Programmatic, Google, Facebook, Twitter & YouTube, respectively Derivative Plays The most direct play in the large cap ecosystem is GOOGL, which has built out its Programmatic capabilities over the past few years. YHOO is also a significant large cap player in the space who has steadily expanded its Programmatic capabilities by building out its own automated ad marketplace and ad buying platforms. Amongst the small caps, CRTO, RUBI and TUBE are the clear derivatives on the Programmatic trend, both having platforms largely based around Programmatic technology. 5. Next-day/Same-day/Next-hour/Same-hour Delivery Surge The significant steps that Online retailers are taking to improve their fulfillment capabilities could lead to the broad rollout of next-day and eventually same-day delivery. This will not only increase the value proposition for Online shopping compared to brick & mortar shopping, but will also allow ecommerce to expand into new verticals, such as Consumer Packaged Goods, which may have a more time-sensitive element to them. We think that this element of improving convenience in ecommerce transactions is increasingly important. In fact, we have seen a positive trend in interest levels in our three annual US Online Retail surveys, particularly among those who are extremely interested and very interested. According to our latest survey, 58% of US Online Shoppers are either extremely interested or very interested in guaranteed Next-day delivery, and 55% of US Shoppers are either extremely interested or very interested in guaranteed Same-day delivery. These are materially elevated levels vs. when we ran the same survey back in 2013, when 43% of respondents said they were interested in Next-day delivery, and 39% said they were interested in Same-day delivery. December 16,

32 Exhibit 31: How interested would you be in guaranteed Next-day Shipping? (left) Same-day Shipping? (right) 21% Extremely interested 22% 31% 22% Very interested 27% 27% 30% Moderately interested 29% 25% 18% Slightly interested 16% 12% 9% Not at all interested 6% 4% 0% 10% 20% 30% 40% June 13 June 14 Sept 15 20% Extremely interested 23% 32% 19% Very interested 19% 23% 25% Moderately interested 26% 24% 21% Slightly interested 21% 15% 15% Not at all interested 12% 7% 0% 10% 20% 30% 40% June 13 June 14 Sept 15 Source: RBC Capital Markets; Proprietary survey of 1,793 respondents via Survey Monkey But the Flywheel Seeds for Same-day Delivery have been planted, and we are seeing some very early green-shoots. In our most recent survey, we tested whether Amazon SDD customers were more loyal (more spend, more purchases, more satisfaction, more intent to spend) than other Amazon customers. The answer, per our survey, is yes. 39% of SDD customers spend $800+ a year with Amazon vs. 28% of non-sdd customers. 61% of SDD customers use Amazon at least 2 3x per month vs. 41% of non-sdd customers. 89% of SDD customers plan to spend the same or more with Amazon over the next 12 months vs. 88% of non-sdd customers. (Minor difference, granted.) And 90% of SDD customers are extremely satisfied or very satisfied vs. 86% of non-sdd customers. (Perhaps not a dramatic difference, though the exhibit scaling does suggest a big gap.) December 16,

33 Exhibit 32: Non-Same-day Delivery Users vs. Same-day Delivery Users % of Respondents : Spending >$800 on annualized basis Using Amazon at least 2 3x per month 45% 70% 40% 39% 61% 60% 35% 30% 28% 50% 41% 25% 40% 20% 30% 15% 10% 5% 20% 10% 0% Non SDD Users SDD Users 0% Non SDD Users SDD Users Planning to spend more/similar on Amazon in next 12 mo. That are either Extremely Satisfied or Very Satisfied 90% 91% 89% 89% 90% 88% 90% 88% 87% 89% 86% 88% 85% 84% 87% 86% 83% 86% 82% 85% 81% 80% 84% Non SDD Users SDD Users Non SDD Users SDD Users Source: RBC Capital Markets; Proprietary survey of 1,617 respondents via Survey Monkey The takeaway point here is that with Same-day Delivery, Amazon is likely establishing Future Flywheels. Although there will be an enormous amount of execution risk, the company is likely also developing Future Flywheels with Prime Now (one-hour delivery) and Amazon Fresh (grocery delivery). And these Flywheels should support premium growth both revenue and EPS for Amazon s retail segment for years to come. In order to facilitate this, Amazon has been at the forefront of this effort through a large build-out of fulfillment centers. December 16,

34 Exhibit 33: AMZN Fulfillment Center Locations Source: Company website Derivative Plays AMZN is currently the biggest derivative of this trend because of its fulfillment center build-out. EBAY and GOOGL get distant honorable mentions. 6. Cloud Computing Critical Mass The market for Cloud Computing will likely continue to grow rapidly for some time to come. According to the Cisco Global Cloud Index, global cloud datacenter traffic overtook traditional traffic in 2013, and Cloud computing is expected to outpace Traditional data center growth over the next five years (33% Cloud CAGR vs. 5% Traditional E). This is partially due to the tremendous flexibility and increased utilization that Cloud architectures allow. December 16,

35 Exhibit 34: Global Data Center Traffic 12,000 Exabytes Personal Cloud Consumers (MM users) 2016 US Internet Sector Outlook 10,000 8,000 6,000 4,000 2,000 0 Traditional: 5% CAGR Cloud: 33% CAGR 2,110 2,956 4,017 5,328 6, ,339 1,467 1,594 1, E 2016E 2017E 2018E 2019E Traditional Data Center Traffic Cloud Data Center Traffic Source: Cisco Global Cloud Index, RBC Capital Markets Furthermore, in terms of users, Cisco estimates that by B consumer Internet users (55% of the Internet using population) will use personal cloud storage a notable rise from the 42% (1.1B users) using personal cloud storage in These personal content lockers have been helped by the increased use of tablets, SmartPhones, and other mobile devices, which allow access to personal content lockers in a manner convenient to the user. Companies such as Amazon, Apple, Google, Box and DropBox have made access to the Cloud easier (and cheaper or free for many services ) for consumers to access. Exhibit 35: Personal Cloud Storage User Growth 2,500 2,000 1,500 1,136 1,355 12% CAGR 1,571 1,740 1,898 2,045 1, E 2016E 2017E 2018E 2019E Source: Cisco Global Cloud Index, RBC Capital Markets In terms of dollars spent, the market for Public Cloud Computing services is also expanding rapidly. Technology Business Research (TBR) (9/27/2015, Roundup Of Cloud Computing Forecasts And Market Estimates Q3 Update, 2015) predicts that total global cloud spend will reach $112B in 2018 from $70B in 2014, growing at a 12% CAGR, with Infrastructure as a Service (IaaS) being the fastest growth category. IaaS is also Amazon s AWS strong suite, with AWS being used by 57% of IaaS customers, according to a recent study by 451 Research (04/15/2015, Amazon Web Services and VMWare are Market Leaders In IaaS and On- Premises Cloud Platforms, According to 451 Research s Vendor Window). December 16,

36 Exhibit 36: Global Cloud Services Growth Forecast $120 Market Size ($B) $100 $80 $60 $40 $20 $5 $16 $35 $9 $8 $7 $27 $23 $20 $43 $49 $55 $11 $10 $34 $31 $62 $67 $ E 2016E 2017E 2018E SaaS IaaS PaaS Source: TBR via Forbes, RBC Capital Markets We see the growing market for cloud computing services having two impacts on the Internet space. First, some large cap Internet names, such as AMZN and GOOGL, are offering cloud services. Secondly, the availability of cloud services opens the door for more new and disruptive companies. Small, rapidly growing companies can self-fund early growth in data storage, rather than needing to secure funding to build out their server capacity. As one example, the cloud-based Web presence offered by Wix.com allows a small business to create a Website and then scale up their business services on Wix servers. Derivative Plays AMZN is the primary play off this trend because of the success of AWS. GOOGL is also in the mix with its Google Cloud Compute Engine. 7. The Cash Pileup & M&A Fever Internet companies have generated significant cash in recent years, a stark change from the 90 s and the 00 s. We think this cash pileup opens the door for more potential future acquisitions, as well as the increased possibility of direct returns to shareholders in the form of buybacks (thanks Alphabet!) and dividends. This has come largely as result of the Large Cap Internet companies growing stronger, as have their cash (and equity) balances. This has led both to more acquisitions and more cash returned to shareholders GOOGL (yeah, Google, a seminal event!), PCLN, EBAY, and YHOO buybacks, as well as dividends from EXPE, IACI and MCHX. In the chart below we show the Q3:15 cash balances for our entire coverage universe. The average proportion of cash to market cap is now 17%, and that s including all of our small cap names, which most often generate considerably less cash than their mature counterparts. December 16,

37 Exhibit 37: Internet Coverage Universe Cash Positions Company Cash Balance ($MM) Market Cap Cash/Market Cap Dividend Company Cash Balance ($MM) Market Cap Cash/Market Cap Dividend AMZN 14, ,078 5% P 364 2,677 14% ANGI % PCLN 9,522 65,168 15% Potential AWAY 905 3,417 26% QUOT % BABA 16, ,341 8% RATE 139 1,361 10% CRTO 286 2,431 12% RUBI % EBAY 8,000 33,576 24% Potential SALE % EXPE 1,501 16,002 9% Current SFLY 96 1,547 6% FB 15, ,842 5% SSTK 211 1,140 19% GDDY 295 2,183 14% TREE 205 1,159 18% GOOGL 72, ,155 14% Potential TRIP ,893 38% GRPN 1,110 1,831 61% TRUE % GRUB 295 2,041 14% TRUP % IACI 820 4,952 17% Current TUBE % KING 786 5,620 14% TWTR 3,489 16,964 2% LNKD 3,089 30,062 10% WEB 18 1,151 9% LQDT % WIX % MCHX % Current YELP 369 2,238 9% NFLX 1,667 50,656 3% YHOO 6,292 31,079 9% Potential NILE % ZG 625 4,536 9% Source: Company reports, RBC Capital Markets Cash Balance ($MM) Market Cap Cash/Market Cap Average 4,244 42,220 18% Median 329 2,211 13% Only three of these companies (EXPE, IACI, and MCHX) currently pay regular dividends, but we think several other names are potential dividend payers in the coming years (EBAY, GOOGL, PCLN & YHOO). However, the most likely result of the large cash accumulation is that we will continue to see substantial acquisitions. Below we list a number of large Internet acquisitions that took place over the last two years. Among these are nine (almost made it to double-digits) $1B+ acquisitions including Expedia HomeAway, Activision Blizzard King Digital, Liberty Interactive Zulily, and Verizon AOL. Those with the biggest balance sheets should have the most options. December 16,

38 Exhibit 38: Significant Recent Internet Acquisitions Announce Deal Value % of Buyer Acquiror Target Date Status ($ Billions) Mkt. Cap. Expedia HomeAway 11/04/15 Annc. $ % Activision Blizzard King Digital 11/02/15 Annc. $ % Liberty Interactive Zulily 08/17/15 Closed $ % Ctrip elong 05/22/15 Closed $ % Verizon AOL 05/12/15 Closed $ % Pitney Bowes BorderFree 05/05/15 Closed $ % Expedia Orbitz 02/12/15 Closed $ % Expedia Travelocity 01/23/15 Closed $ % Amazon Twitch 08/26/14 Closed $ % Zillow Trulia 07/28/14 Closed $ % Expedia Wotif 07/06/14 Closed $ % Priceline OpenTable 06/12/14 Closed $ % Facebook Oculus VR 03/25/14 Closed $ % Facebook WhatsApp 02/20/14 Closed $ % Source: Company reports, RBC Capital Markets Derivative Plays Internet companies with large cash balances will have more flexibility to pursue strategic acquisitions or to return capital to shareholders via buybacks or dividends. We believe that the primary plays off of this trend are AMZN, BABA, EBAY, EXPE, FB, GOOGL, GRPN, LNKD, PCLN, SSTK, TWTR and YHOO. 8. Unicorn Derivatives Positive & Negative As we highlighted in our recent Bulls, Bears And Unicorns? report, never before have Finance and My Little Pony had something in common. For those unfamiliar with this tech slang, the Unicorn term was coined by leading tech investor Aileen Lee of Cowboy Ventures and refers to the large number of private tech companies that currently carry valuations of over $1B. Even though there recently appears to have been a healthy cooling off in enthusiasm for Unicorns, we now reportedly have over 140 Tech Unicorns across the globe, and these are impacting the incumbent public Nets in a variety of ways, both positively and negatively. To begin with, we start by sharing with you a list of some of the larger / better known Unicorns below. December 16,

39 Exhibit 39: A Sampling of The Current Herd (or is it a Drove?) of Unicorns Company Valuation ($B) Country Company Valuation ($B) Country Uber $65 United States Hellofresh $3 Germany Xiaomi $46 China Slack Technologies $3 United States Airbnb $26 United States Bloom Energy $3 United States Palantir Technologies $20 United States POWA Technologies $3 United Kingdom Snapchat $16 United States Snapdeal $3 India Flipkart $15 India Lyft $3 United States Didi Kuaidi $15 China Vice Media $3 United States SpaceX $12 United States Mozido $2 United States Pinterest $11 United States Adyen $2 Netherlands Dropbox $10 United States Houzz $2 United States Lufax $10 China Klarna $2 Sweden WeWork $10 United States SurveyMonkey $2 United States DJI Innovations $10 China Evernote $2 United States Theranos $9 United States Avant $2 United States Spotify $9 Sweden NantHealth $2 United States Meituan $7 China Nutanix $2 United States Intarcia Therapeutics $6 United States One97 Communications $2 India Stripe $5 United States Github $2 United States Olacabs $5 India Domo Technologies $2 United States Coupang $5 South Korea Trendy Group Internation $2 China Zenefits $5 United States Instacart $2 United States Cloudera $4 United States Blue Apron $2 United States Dianping $4 China Magic Leap $2 United States Social Finance $4 United States Prosper Marketplace $2 United States Tanium $4 United States Zocdoc $2 United States Credit Karma $4 United States Oscar Health Insurance C $2 United States Atlassian $3 Australia The Honest Company $2 United States Jawbone $3 United States MongoDB $2 United States Delivery Hero $3 Germany BlaBlaCar $2 France Global Fashion Group $3 Luxembourg Insidesales.com $2 United States Fanatics $3 United States Mu Sigma $2 India Legendary Entertainment $3 United States GuaHao $2 China Stemcentrx $3 United States MuleSoft $2 United States Ele.me $3 China Buzzfeed $2 United States VANCL $3 China Jet.com $2 United States DocuSign $3 United States ironsource $2 Israel Moderna $3 United States Koudai Gouwu $1 China ContextLogic (dba. Wish) $3 United States Jasper Technologies $1 United States Source: CB Insights, RBC Capital Markets We d note that despite the hype, recently some Unicorns within the space (i.e., Dropbox, Snapchat) have had their valuations marked down. According to Fortune, in November Fidelity marked down the value of its investment in Snapchat by 25% while according to the WSJ, Blackrock marked down its estimate of Dropbox s per-share value by 24% in October. We generally agree with Khosla Ventures Keith Rabois, The steroid era of start-ups is over. December 16,

40 While there has been a very large focus on the Unicorns and their valuations and fundamentals, there has been very little focus on their public market derivatives. Yet, we see several sizeable derivatives some positive and some negative. We would categorize the derivatives into three segments: (1) Public companies that have benefitted as suppliers to the Unicorns. (2) Public companies that are facing increased direct competition from the Unicorns. (3) Public companies that are facing employee retention/competitive compensation issues from the Unicorns. Here s a quick take on each segment: The Unicorn Supplier Beneficiaries: Our guess is that a high percentage of the Unicorns listed above use Amazon Web Services. Dropbox, for example, has been publicly described as one of the largest customers of AWS. (Snapchat reportedly uses Google for its infrastructure services, making it a bit of an exception.) The joke in the Valley has been that VCs have been providing their portfolio companies with Amazon gift cards with which to purchase AWS services. And Unicorns that have been attempting to acquire customers have been active in terms of buying app-install ads on Facebook and Twitter. We don t believe that companies like Amazon or Facebook have built up an excessive dependency on Unicorns for some of their segment growth, but we also believe their overall growth rates have been at the margin boosted by the Unicorn financing movement. That makes them Unicorn Supplier Beneficiaries. The Negative Unicorn Derivatives (NUDs): Several of the Unicorns, if successful, could mutate into material, direct competitors to existing public companies. In the Internet sector, we think of the impact of Spotify on Pandora, the potential impact of Airbnb on Expedia and Priceline, and the possible impact of Snapchat and Pinterest on Facebook, Google and Twitter. These impacts could take substantial time to play out and may never become material. But they could become material. And that s why we have coined the term NUDs. Employee Retention/Compensation Competition Impacts: The first public reference to this impact came during the Yelp Q2 earnings call when one astute analyst asked management whether they were seeing rising employee attrition due to the Unicorn boom. To his credit, the Yelp CFO acknowledged that the company was seeing higher attrition, with some of the company s salesforce leaving for higher-paid positions at some of the Unicorns. Shutterfly s CEO made a similar acknowledgement on his earnings call and a slew of recent departures from Twitter have been reportedly attributed to the appeal of joining Uber, according to TechCrunch (9/22/2015, Twitter Loses Its Sr. Director of Engineering, Growth and International Team To Uber). As a broad point, we believe that the Unicorn phenomenon has created employee retention issues at several of the public Internet companies, especially those in the Bay Area with lagging stock prices. Exhibit 40: Unicorn Derivatives and Their Impact on Public Companies Source: RBC Capital Markets, Company reports Wage Inflation Direct Competition New Customers Unicorns offering very attractive pay packages causing churn at public companies (esp. those with underperforming stocks). Unicorns creating direct/indirect competition for public players within their industries. Several public companies likely benefitting rom providing serviecs to the private companies YELP CFO acknowledges highter attrition on Q2 Call Airbnb vs. AWAY, EXPE, PCLN, TRIP AMZN's AWS segment providing cloud infrastructure SFLY CEO makes similar comment during Q2 call Spotify vs. Pandora FB & TWTR providing App Installs for start-ups TWTR employees reportedly heading to Uber Snapchat vs. FB, TWTR, & GOOG Snapdeal vs. GRPN Instacrart vs. AMZN & GOOG BlueApron, Uber (Uber Eats Food Delivery) vs. GRUB & YELP Square vs. PYPL Derivative Plays The obvious play off this trend is AMZN, with its AWS services being used by many of the Unicorns. FB and TWTR are likely also benefiting from App Download December 16,

41 Advertisements, as is GOOGL from the volume of Online Ad campaigns being run by these well-capitalized privates. 9. Currency Headwinds & Tailwinds Late 2014 into 2015 has been a period of a VERY strong US Dollar, which has had implications across all companies with international exposure. In talking with the management teams of the Net sector, we see several implications for global Net stocks, including: Transitional overseas generated revenue has translated back into fewer US $ s; Transactional Fewer US services/goods/trips are booked by those with weaker relative currencies, lowering unit metrics the surge of the dollar has served as a tax on crossborder trade, especially for US-based companies; and Margins Have been negatively impacted as costs are generally disproportionally paid in US Dollars in relation to revenues. Exhibit 41: Pricing Power Amongst the Subscriptions Nets 105 We would point out that if interest rates are raised in the US, as may occur when the Fed meets in mid-december, it could cause the USD to rise further. We also note that our RBC FX Strategy team sees some room for the USD to continue to gain in 2016, and thus we are not holding our breath for any major Q1 reversals. 100 Relative Index Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 EUR/USD GBP/USD CAD/USD JPY/USD Source: Company Reports, RBC Capital Markets Together, these currency movements made 2015 a tough year for GAAP growth on many Internet companies (reporting in USD) with significant International exposure. Below, we highlight some of the Large Caps with the greatest International market exposure, and thus most susceptible to the Transaction, Translational and Margin pressures discussed above. December 16,

42 Exhibit 42: 2014 Top-line Exposure to International Markets of Large-Cap Nets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenue 100% Gross Profit 87% GMV 59% Gross Revenue 55% Ex- U.S. & Canada Revenue 53% Revenue 49% Revenue 45% Revenue Retail Revenue 40% 38% Revenue BABA PCLN EBAY GOOGL FB TRIP EXPE LNKD AMZN TWTR NFLX YHOO 33% Revenue 24% Revenue 19% Source: Company Reports, RBC Capital Markets Derivative Plays Should the US Dollar stabilize or actually weaken relative to global currencies, this could create a tailwind in Companies with the largest International revenue exposure are PCLN, EBAY, GOOGL, FB, TRIP, EXPE, LNKD, and AMZN. 10. The Rise Of The Sharing Economy Orange may be the new black but Renting is the new Owning in the Digital world; almost all types of media (even books) can now be rented and accessed digitally. In addition, users across Net land continue to opt for services that allow them to access the media they want without ever buying it. This trend is clearly illustrated by the success of platforms like Netflix, Pandora, and Spotify, who have built business models that cater to the new preference of users to have only temporary ownership of media. We foresee that the ascent of rental models will continue into We think this concept of renting has extended to sharing under-utilized assets from cars to homes to many things in between. The Sharing Economy (also known as shareconomy or collaborative consumption) refers to peer-to-peer-based sharing of access to goods and services (coordinated through community-based Online services). The recent rise of sharing economy driven business models is likely resulting from two changes in Internet users: (1) a millennial Internet population that tends to have lower levels of switching costs across brands or affiliations, and (2) a Mobile-first Internet population with an on-demand expectation of goods and services. December 16,

43 Exhibit 43: The Ascent of Rent Business Models Source: RBC Capital Markets Though this trend is especially prominent with regards to digital media (as shown in the exhibit above), the rent vs. own mentality is quickly spreading to physical assets as part of the new Sharing Economy. In particular, ridesharing services such as Uber and Lyft epitomize this mentality: these are taxi alternatives, though the opportunity is potentially much larger than that (food-delivery, etc.). These companies have grown materially while allowing car-owners to make money on the side. Similarly, AirBnB has allowed home/apartment owners to rent out their living spaces to earn money on the side. Don t expect this trend to go away anytime soon. Derivative Plays Companies that will benefit from the advent of the sharing economy and the rental and selective access of digital media include NFLX and P. While AMZN might be a long-term beneficiary of this trend, our concern that that the company will see its revenue growth somewhat dislocated as its business model is more geared towards media retail than media purchase. We also note that GOOGL (via the Google Play store accessed with associated Smartphones and Chrome devices and well as the recently announced YouTube Red service) also stands to benefit from the trend. December 16,