12 06 10-10 02 14 am

UBS Investment Research

Key Call: Google Inc.

Reiterate Buy; Positive Trends Continue…

Solid CPC Growth; Proprietary Checks Show Image Ads Still Prevalent Search Engine Marketer, Efficient Frontier, recently noted strong CPC increases in November: Finance (+10% Y/Y); Retail (+6%); Automotive (+24%) and Travel(+37%). Also, per our proprietary processes, Product Listing Ads remain prevalent– across our database of 100K+ commercial keywords, 10% had a product imageadvertisement (see charts 1& 2 inside). Overall coverage trends (i.e. a query withany sponsored advertisement) remained positive with commercial queries at 97%+.

Drill Down on Product Listing Ads by Vertical Drilling down a bit on specific verticals: categories with the highest penetration of Product Listing Ads were: Home & Garden (~21%); Clothing & Shoes (~17%);Animals (~12%); Food & Restaurants (~11%); and Sports & Recreation (~10%).Penetration across these top 5 categories alone was 17% (weighted average), with these 5 categories accounting for roughly 36% of the 100,000+ database keywords.

Our thoughts on NY real estate purchase and impending eBookstore The Wall Street Journal reported that Google has tentatively agreed to purchase111 8th Ave (New York) for $1.9B. The asset is one of the primary internetgateways in NY and resides directly on top of the 8th Ave fiber line, therebyreducing latency to a minimum. In addition, Google is set to launch its e-book store (per WSJ), Google Editions. The company is likely to differentiate GoogleEditions by offering open format books that can be read across multiple devices.

Valuation: Our $720 PT is based on our DCF (12% WACC, 3.5% LTGR) Our PT implies 18x ’11E EPS (ex $104/shr in cash + mkt securities).

Highlights (US$k) 12/08 12/09 12/10E 12/11E 12/12ERevenues 15,856,598 17,481,147 21,832,318 25,786,287 29,506,397EBIT (UBS) 7,941,935 9,476,240 11,731,736 13,714,252 15,982,046Net Income (UBS) 6,283,673 7,416,493 9,335,113 10,880,154 12,717,342EPS (UBS, US$) 19.79 23.02 28.90 33.67 39.35Net DPS (UBS, US$) 0.00 0.00 0.00 0.00 0.00 Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12EEBIT margin % - 54.2 53.7 53.2 54.2ROIC (EBIT) % - 42.0 41.8 45.2 53.4EV/EBITDA (core) x - 8.9 9.9 8.2 7.1PE (UBS) x - 19.1 19.8 17.0 14.6Net dividend yield % - 0.0 0.0 0.0 0.0 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic items at the analysts' judgement. Valuations: based on an average share price that year, (E): based on a share price of US$573.00 on 03 Dec 2010 19:38 EST Brian Pitz Analyst [email protected] +1-212-713 9310

Brian Fitzgerald Analyst [email protected] +1-212-713 2851

Kaizad Gotla, CFA Associate Analyst [email protected] +1-212-713 2603

Global Equity Research Americas

Internet Services

12-month rating Buy Unchanged 12m price target US$720.00 Unchanged

Price US$573.00 RIC: GOOG.O BBG: GOOG US

6 December 2010 Trading data 52-wk range US$626.77-436.07Market cap. US$138bnShares o/s 240m (COM)Free float 50%Avg. daily volume ('000) 3,149Avg. daily value (m) US$1,775.2 Balance sheet data 12/10E Shareholders' equity US$45.7bnP/BV (UBS) 4.0xNet Cash (debt) US$14.8bn Forecast returns Forecast price appreciation +25.7%Forecast dividend yield 0.0%Forecast stock return +25.7%Market return assumption 5.5%Forecast excess return +20.2% EPS (UBS, US$) 12/10E 12/09 UBS Cons. ActualQ1 6.76 6.76 5.16Q2 6.45 6.45 5.36Q3 7.64 7.64 5.89Q4E 8.09 7.99 6.7912/10E 28.90 28.7812/11E 33.67 33.31 Performance (US$)

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Source: UBS www.ubs.com/investmentresearch

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 14. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]



Key Call: Google Inc. 6 December 2010

UBS 2

Update: Product Listing Ads Remain Prevalent We recently ran searches on a basket of 100,000+ commercial keywords on Google and found ~10% of all search result pages yielded a product image advertisement (a ‘Google Product Listing Ad’) in the sponsored listings (see chart 1). The program is currently in Beta, with the program expanding to more merchants and users over time.

Our checks suggest these product ads have significantly higher (+40-50%) better click-through rates than conventional text sponsored listings. These ads are monetized on a CPA or Cost-Per-Action basis, though we see the potential for blended monetization techniques (CPA, CPM, CPC, etc). We believe Product Image Ads create a more engaging user experience by including richer product information (product image, price, and merchant name), while also making it easy for merchants to promote their broader catalogs / product lines on Google.

Product Listing Ads -- What They Do

Product Listing Ads are search ads that include richer product information - including product image, price, and merchant name - without requiring additional keywords or ad text. Whenever a user enters a search query relevant to an item in a Google Merchant Center account, Google may automatically show the most relevant products along with the associated image, price and product name.

Product Listing Ads are charged on a cost-per-action (CPA) basis, which means that the advertiser only pays when a user clicks on the ad and completes a purchase (i.e. coverts). As these ads monetize further down consumer purchase funnel, CPA rates are higher than typical CPC rates.

Chart 1: Example of Google Product Ads

Source: Google


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We drilled down a bit on specific verticals: categories with the highest penetration of Product Listing Ads were: Home & Garden (~21%); Clothing & Shoes (~17%); Animals (~12%); Food & Restaurants (~11%); and Sports & Recreation (~10%). Penetration across these top 5 categories alone was 17% (weighted average), with these 5 categories accounting for roughly 36% of the 100,000+ keywords in the database.

Chart 2: Penetration of Google Product Listing Ads by Key Verticals

CategoryNumber of Keywords

Keywords w/ a Product Image Ad

% of Keywords w/ Product Image Ad

1 Home_&_Garden 16,781 3,587 21%2 Clothing_&_Shoes 8,389 1,390 17%3 Animals 898 105 12%4 Food_&_Restaurants 4,595 519 11%5 Sports_&_Recreation 5,618 586 10%6 Computers_&_Electronics 9,543 749 8%7 Health_&_Wellness 9,833 641 7%8 Arts_&_Entertainment 7,538 473 6%9 Beauty_&_Personal_Care 6,182 346 6%

10 Society_&_Culture 3,936 197 5%11 Science,_Social_Sciences_&_Humanities 3,645 168 5%12 Vehicles 4,287 193 5%13 Business 4,889 218 4%14 Travel_&_Lodging 7,402 229 3%15 Families_&_Relationships 3,132 65 2%16 Education_&_Instruction 3,332 55 2%

Top 5 Sum 36,281 6,187 Top 5 Weighted Average 17%

Total Sum 100,000 9,521 Total Weighted Average 10%

Source: UBS Internet Research


UBS 4

Google eCommerce Coverage Still Trending at 97%+ Through Q4

Our proprietary system of checking Google coverage indicates coverage across our very broad basket of keywords (which also includes the top daily words out of Google Trends) has been trending as expected through Q4. Note, when we run a basket of 24,000+ eCommerce oriented keywords, coverage is -- as expected – greater than 97%. For commercially viable queries/keywords, the coverage has run begun to run ‘deeper’ as there are more than the traditional 10 sponsored links on the right column as hybrid ads continue to be deployed (case in point – search for “Xbox 360”).

Chart 3: Coverage on Google US (www.google.com) Across 24,000+ Commercially Oriented Keywords

US Coverage (24K keywords)

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Chart 4: Google coverage on various Google sites across a basket of broad keyword (English) US Coverage

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UBS 6

Google Close to Launching E-Book Offering According to the Wall Street Journal, Google is set to launch its e-book store, Google Editions in the near term. The company is likely to differentiate Google Editions by offering open format books that can be read across multiple devices. In addition, users can purchase books directly from Google or from other online book retailers in a “digital locker” of sorts. We believe Google is in a good position to drive e-book sales given that it may be able to integrate Google Editions into its natural and paid search listings when a user searches for a certain keyword or topic. It is unclear what the revenue split may likely be between Google and its retail partners.

Thoughts on the NY Real Estate Purchase The Wall Street Journal reported that Google has tentatively agreed to purchase 111 8th Ave (New York) from owner Taconic Investment Partners. The property is one of the largest buildings in New York at nearly 3MM sq ft with a diverse roster of Internet and telecom tenants (MCI, Sprint, Level 3, Verizon). The asset is one of the primary internet gateways in New York and resides directly on top of the 8th Avenue fiber line, thereby reducing latency to a minimum.

The property currently serves as the NY headquarters for Google and we expect the company will use it for a combination of personnel and infrastructure expansion. Given Google's large and growing share in the online display market, we believe the company is looking to grow ties with the Madison Avenue ad agencies. In addition, New York provides a large pool of engineering talent for Google.

Citing people familiar with the matter, the WSJ reports the building at 111 Eighth Avenue produces an initial yield of ~5% when valued at $1.9B.

Our Thoughts on Groupon Last week we saw media reports (Wall Street Journal) suggested that GOOG was in final negotiations to acquire group-buying site Groupon, thoughout most of the week, with news coming late Friday that talks were off.

The deal was said to be worth $5.3B, with an additional $700MM in performance based earnouts. The $6B valuation implied a reasonable 3x Price/Sales multiple, based on reports suggesting Groupon’s 'run-rate' revenue of $2B (with the valuation coming in at 10x Price/Sales on other reports pointing to an annual revenue figure of $600MM, potentially excluding pass-through revenue).

Either way -- we appreciate Groupon's strategic value, allowing a potential acquirer to at once strengthen its local advertising, social networking, and eCommerce ambitions. Groupon allows retailers to acquire valuable ‘foot traffic’ instead of ‘web traffic’; a strong value proposition for local. We note strong demand for Groupon’s services in the near-term as it plans numerous strategic expansions.


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Groupon’s financials sound impressive, as the company takes a 50% revenue share. Our main concern is sustainability moving forward, especially given the intense competition. We would also cite some Groupon merchants who question its ability to generate repeat business. We believe AMZN’s $175MM stake in LivingSocial would ease anti-trust concerns.


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Table 7: Internet and Interactive Entertainment Comp Sheet Estimates

($MMs, except EPS) Ticker Rating Market CapGross Operating

Company 12/3/2010 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011EInteractive EntertainmentActivision ATVI Buy $14,641 $4,879 $5,210 $4,546 $4,709 $1,586 $1,871 $1,485 $1,588 $0.80 $0.91 $0.76 $0.82 $2,187 $1,388 63.5% 29.0%Electronic Arts ERTS Buy 4,961 3,885 4,067 3,804 4,003 445 578 464 598 0.75 1.01 0.64 0.84 557 (6) 56.5 8.6GameStop GME NR 3,201 -- -- 9,505 9,839 -- -- 847 881 -- -- 2.67 2.91 401 430 -- --TakeTwo TTWO Neutral 965 1,098 1,221 1,108 1,151 89 115 88 111 0.64 0.97 0.68 0.90 97 51 37.1 6.7THQ Inc. THQI Neutral 367 850 925 843 924 11 40 5 40 ($0.12) 0.26 (0.15) 0.30 1 (44) 33.3 (0.3)

Advertising & Related ServicesGoogle GOOG Buy 183,236 21,832 25,786 21,668 25,533 13,151 15,910 12,974 15,207 28.90 33.67 28.78 33.31 9,915 11,339 86.2 53.7Yahoo! YHOO Neutral 22,910 4,557 4,504 4,572 4,716 1,646 1,602 1,484 1,543 0.76 0.79 0.86 0.78 702 804 81.4 21.8IAC / InterActiveCorp IACI Neutral 3,133 1,654 1,775 1,645 1,817 258 283 259 298 0.90 1.40 0.88 1.37 198 176 64.4 11.6WebMD WBMD NR 2,919 -- -- 532 627 -- -- 171 215 -- -- 0.75 1.20 -- -- -- --ValueClick VCLK Neutral 1,342 428 467 427 471 125 136 117 133 1.07 0.83 0.69 0.78 129 64 72.7 27.8AOL AOL Neutral 2,630 2,391 2,104 2,406 2,119 782 489 676 471 2.74 1.40 2.84 1.61 867 347 47.8 21.0United Online UNTD NR 587 -- -- 915 904 -- -- 200 190 -- -- 1.06 0.97 -- -- -- --EarthLink ELNK NR 986 -- -- 595 504 -- -- 213 -- -- -- 0.90 0.69 -- -- -- --comScore SCOR NR 695 -- -- 174 231 -- -- 12 33 -- -- (0.04) 0.27 2 15 -- --Marchex MCHX NR 263 -- -- 96 112 -- -- 8 16 -- -- 0.05 0.23 -- -- -- --Quinstreet QNST Buy 934 335 424 418 496 71 93 89 102 0.56 1.00 0.99 1.13 55 87 28 12

eCommerceAmazon.com AMZN Buy 82,607 34,446 46,146 34,134 43,667 2,583 3,498 2,276 3,056 2.55 3.81 2.51 3.47 2,799 4,062 22.5 4.5eBay EBAY Buy 40,915 9,148 10,004 9,138 10,201 3,279 3,656 3,249 3,607 1.70 1.92 1.69 1.86 2,543 2,868 73.1 30.0Digital River DRIV NR 1,444 -- -- 362 407 -- -- 67 101 -- -- 0.87 1.37 28 50 -- --Mercado Libre MELI NR 3,030 -- -- 215 277 -- -- 79 104 -- -- 1.26 1.55 52 68 -- --GSI Commerce GSIC Buy 1,637 1,361 1,575 1,356 1,562 136 178 135 168 0.52 0.78 (0.27) 0.20 108 113 58.9 2.9OpenTable Inc OPEN NR 1,683 . -- 97 137 -- -- 32 52 -- -- 0.68 1.05 17 29 -- --

Online EntertainmentNetflix NFLX Sell 10,108 2,163 3,084 2,163 2,887 335 399 332 432 2.86 3.56 2.79 3.82 189 306 37.3 7.7Blockbuster BBI NR 20 -- -- 3,314 2,831 -- -- 29 133 -- -- (0.63) (0.57) -- -- -- --

(1) All figures represent "Operating EPS", defined to excludes SBC and 1x items as per Mgmt, except the following companies which are GAAP: VCLK, AMZN, GSIC, NFLX(2) FCF for non-covered companies are FirstCall means(3) ERTS 2010E = Fiscal year ending 03/2011; 2011E = Fiscal Year ending 03/2012(4) THQI 2010E = Fiscal year ending 03/2011; 2011E = Fiscal Year ending 03/2012(5) TTWO 2010E = Fiscal year ending 10/2010; 2011E = Fiscal Year ending 10/2011

FCF2 10E MarginUBS Estimate ConsensusConsensus

EBITDA EPS1 RevenueUBS Estimate Consensus UBS Estimate

Source: FactSet and UBS estimates


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Table 8: Internet and Interactive Entertainment Comp Sheet Valuations

Firm Firm Value / 10-13E 10-13E 2011E 10-13E 2011EYTD Value1 EBITDA EBITDA EPS P/E to Price / FCF / share FCF FCF

Company Ticker Rating 12/02/10 Performance ($MMs) 2010E 2011E CAGR 2010E 2011E CAGR Growth 2010E 2011E CAGR Yield (%)Interactive EntertainmentActivision ATVI Buy $12.08 $14 20% 9% $11,755 7x 6x 9% 15x 13x 10% 1.3 7x 11x (12%) 9.1%Electronic Arts ERTS Buy $15.08 24 62 -15% 3,412 8 6 18 20 15 24 0.6 - 27 (16) 3.7%GameStop GME NR $21.15 -- -- -4% 3,268 4 4 -- 8 7 -- -- -- -- -- --TakeTwo TTWO Neutral $11.47 11 -4 14% 835 9 8 -- 17 13 -- -- -- -- -- --THQ Inc. THQI Neutral $5.40 4.45 -18 7% 344 64 9 -- -- 18 -- -- -- -- -- --

weighted average 3% 8 6 14.6 13 10 0.9 4 11 -10 6.1%mean 2% 18 6 15 13 17 1.0 7 19 -14 6.4%

Advertising & Related ServicesGoogle GOOG Buy $571.82 720 26 -8% 149,371 11 9 16 20 17 16 1.1 19 16 14 6.1%Yahoo! YHOO Neutral $16.33 16.5 1 -3% 13,629 8 9 3 22 21 12 1.7 32 28 14 3.5%IAC / InterActiveCorp IACI Neutral $29.35 30 1 43% 1,956 8 7 11 33 21 24 0.9 16 16 9 6.4%WebMD WBMD NR $51.10 -- -- 33% 2,647 16 12 -- 69 42 -- -- -- -- -- --ValueClick VCLK Neutral $16.27 15 -10 61% 1,116 9 8 10 15 20 -- -- 10 21 (8) 4.8%AOL AOL Neutral $24.57 25 3 6% 1,911 2 4 (22) 9 18 -- -- 3 7 (36) 13.6%United Online UNTD NR $6.86 -- -- -5% 774 4 4 -- 6 7 -- -- -- -- -- --EarthLink ELNK NR $9.11 -- -- 10% 593 3 -- -- 10 13 -- -- -- -- -- --comScore SCOR NR $22.13 -- -- 26% 666 57 20 -- -- 83 -- -- -- -- -- --Marchex MCHX NR $7.49 -- -- 47% 231 29 14 -- 141 33 -- -- -- -- -- --Quinstreet QNST NR $20.61 22 6 37% 899 10 9 20 21 18 34 0.54 17 11 26 9.3%

weighted average 23% 15 12 25 20 12 0.9 29 35 11 4.9%mean 34% 16 11 34 26 22 1.0 26 31 3 6.2%

eCommerceAmazon.com AMZN Buy $176.53 195 10 31% 76,886 30 22 32 69 46 44 1.0 29 20 41 5.0%eBay EBAY Buy $29.91 31 4 27% 32,716 10 9 11 18 16 10 1.5 16 14 11 7.1%Digital River DRIV NR $36.37 -- -- 35% 1,079 16 11 -- 42 26 -- -- -- -- -- --Mercado Libre MELI NR $68.67 -- -- 32% 2,980 38 29 -- 54 44 -- -- -- -- -- --GSI Commerce GSIC Buy $24.46 33 35 -4% 1,729 13 10 24 47 31 -- -- 15 15 16 6.8%Drugstore.com DSCM NR $1.74 -- -- -44% 165 21 11 -- -- 348 -- -- -- -- -- --OpenTable Inc OPEN NR $73.25 -- -- 188% 1,595 49 31 -- 108 70 0 -- -- -- -- --

weighted average 31% 24 18 54 38 31 1 23 17 30 5.3%mean 41% 23 16 51 68 18 1 20 16 23 6.3%

Online EntertainmentNetflix NFLX Sell $193.42 110 -43 251% 10,064 30 25 30 69 54 29 1.8 55 34 28 2.9%Blockbuster BBI NR $0.09 -- -- -86% 908 32 7 -- -- -- -- -- -- -- -- --

weighted average 223% 30 24 64 50 27 1.7 50 31 25 2.7%mean 82% 31 16 69 54 29 1.8 55 34 28 2.9%

Valuation metrics of non-covered companies are based on FirstCall mean estimates(3) ERTS 2010E = Fiscal year ending 03/2010; 2011E = Fiscal Year ending 03/2011

(1) Firm Value equal to Equity Value plus straight and convertible debt, straight and convertible preferred stock, and minority interest less cash and cash equivalents, marketable securities, and equity in unconsolidated affiliates.

Price Price / EarningsPrice

TargetUpside to

Target

Source: FactSet and UBS estimates


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UBS 12

Google Inc.

Income statement (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chRevenues - - 11,660,107 15,856,598 17,481,147 21,832,318 24.9 25,786,287 18.1 29,506,397 14.4 Operating expenses (ex depn) - - (4,739,403) (6,414,776) (6,480,599) (8,681,582) 34.0 (9,876,187) 13.8 (11,093,275) 12.3 EBITDA (UBS) - - 6,920,704 9,441,822 11,000,548 13,150,736 19.5 15,910,101 21.0 18,413,121 15.7 Depreciation - - (967,658) (1,499,887) (1,524,308) (1,419,000) -6.9 (2,195,848) 54.7 (2,431,076) 10.7 Operating income (EBIT, UBS) - - 5,953,046 7,941,935 9,476,240 11,731,736 23.8 13,714,252 16.9 15,982,046 16.5 Other income & associates - - 0 0 0 0 - 0 - 0 - Net interest - - 589,580 316,382 69,003 341,923 395.5 427,106 24.9 552,593 29.4 Abnormal items (pre-tax) - - 0 0 0 0 - 0 - 0 - Profit before tax - - 6,542,626 8,258,317 9,545,243 12,073,659 26.5 14,141,358 17.1 16,534,639 16.9 Tax - - (1,613,289) (1,974,644) (2,128,750) (2,738,546) 28.6 (3,261,204) 19.1 (3,817,297) 17.1 Profit after tax - - 4,929,337 6,283,673 7,416,493 9,335,113 25.9 10,880,154 16.6 12,717,342 16.9 Abnormal items (post-tax) - - (725,617) (2,000,587) (896,045) (1,007,549) 12.4 (1,096,667) 8.8 (1,159,524) 5.7 Minorities / pref dividends - - 0 0 0 0 - 0 - 0 - Net income (local GAAP) - - 4,203,720 4,283,086 6,520,448 8,327,564 27.7 9,783,487 17.5 11,557,818 18.1 Net Income (UBS) - - 4,929,337 6,283,673 7,416,493 9,335,113 25.9 10,880,154 16.6 12,717,342 16.9 Tax rate (%) - - 25 24 22 23 1.7 23 1.7 23 0.1 Pre-abnormal tax rate (%) - - 25 24 22 23 1.7 23 1.7 23 0.1 Per share (US$) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chEPS (local GAAP) - - 13.29 13.49 20.24 25.78 27.4 30.28 17.4 35.76 18.1 EPS (UBS) - - 15.59 19.79 23.02 28.90 25.6 33.67 16.5 39.35 16.8 Net DPS - - 0.00 0.00 0.00 0.00 - 0.00 - 0.00 - Cash EPS - - 18.97 24.79 28.18 33.73 19.7 40.96 21.4 47.34 15.6 BVPS 22.19 14.94 96.35 118.36 113.60 143.29 26.1 178.65 24.7 218.57 22.3 Balance sheet (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chCash and equivalents - - 6,081,593 8,656,672 10,197,588 14,835,210 45.5 26,340,026 77.6 39,932,583 51.6 Other current assets - - 11,207,545 11,521,510 18,969,370 27,811,035 46.6 27,700,036 -0.4 28,360,397 2.4 Total current assets - - 17,289,138 20,178,182 29,166,958 42,646,246 46.2 54,040,063 26.7 68,292,980 26.4 Net tangible fixed assets - - 4,039,261 5,233,843 4,844,610 5,752,032 18.7 5,964,961 3.7 6,027,479 1.0 Net intangible fixed assets - - 2,745,964 5,836,544 5,677,503 7,021,927 23.7 6,851,312 -2.4 6,719,357 -1.9 Investments / other assets 0 0 1,261,443 519,006 807,707 1,266,446 56.8 1,320,701 4.3 1,365,914 3.4 Total assets - - 25,335,806 31,767,575 40,496,778 56,686,650 40.0 68,177,037 20.3 82,405,729 20.9 Trade payables & other ST liabilities - - 2,035,602 2,302,090 2,747,467 9,378,718 241.4 9,436,673 0.6 10,483,177 11.1 Short term debt - - 0 0 0 0 - 0 - 0 - Total current liabilities - - 2,035,602 2,302,090 2,747,467 9,378,718 241.4 9,436,673 0.6 10,483,177 11.1 Long term debt - - 0 0 0 0 - 0 - 0 - Other long term liabilities - - 610,525 1,226,623 1,745,087 1,588,549 -9.0 1,683,831 6.0 1,836,725 9.1 Total liabilities - - 2,646,127 3,528,713 4,492,554 10,967,267 144.1 11,120,504 1.4 12,319,902 10.8 Equity & minority interests - - 22,689,679 28,238,862 36,004,224 45,719,383 27.0 57,056,533 24.8 70,085,828 22.8 Total liabilities & equity - - 25,335,806 31,767,575 40,496,778 56,686,650 40.0 68,177,037 20.3 82,405,729 20.9 Cash flow (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chNet income - - 4,203,720 4,283,086 6,520,448 8,327,564 27.7 9,783,487 17.5 11,557,818 18.1 Depreciation - - 967,658 1,499,887 1,524,308 1,419,000 -6.9 2,195,848 54.7 2,431,076 10.7 Net change in working capital - - 318,545 232,131 485,987 949,786 95.4 209,981 -77.9 493,824 135.2 Other (operating) - - 285,487 1,837,750 785,455 1,270,370 61.7 1,388,186 9.3 1,471,477 6.0 Net cash from operations - - 5,775,410 7,852,854 9,316,198 11,966,720 28.5 13,577,502 13.5 15,954,196 17.5 Capital expenditure - - (2,402,840) (2,358,461) (809,888) (2,051,959) 153.4 (2,238,162) 9.1 (2,361,638) 5.5 Net (acquisitions) / disposals - - (906,651) (3,319,237) (108,024) (860,000) 696.1 0 - 0 - Other changes in investments - - (372,098) 358,276 (7,101,293) (5,499,000) - 0 - 0 - Cash from investing activities - - (3,681,589) (5,319,422) (8,019,205) (8,410,959) 4.9 (2,238,162) -73.4 (2,361,638) 5.5 Increase/(decrease) in debt - - 0 0 0 0 - 0 - 0 - Share issues / (repurchases) - - 23,861 (71,521) 143,141 (1,081,896) - 165,476 - 0 - Dividends paid - - 0 0 0 0 - 0 - 0 - Other cash from financing - - 379,206 159,088 90,271 5,345 - 0 - 0 - Cash from financing activities - - 403,067 87,567 233,412 (1,076,551) - 165,476 - 0 - Cash flow chge in cash & equivalents - - 2,496,888 2,620,999 1,530,405 2,479,210 - 11,504,816 - 13,592,557 - FX / non cash items - - - (45,920) 10,511 2,158,412 20434.8 0 - 0 - Bal sheet chge in cash & equivalents - - - 2,575,079 1,540,916 4,637,622 - 11,504,816 - 13,592,557 - Core EBITDA - - 6,920,704 9,441,822 11,000,548 13,150,736 19.5 15,910,101 21.0 18,413,121 15.7 Maintenance capital expenditure - - (2,402,840) (2,358,461) (809,888) (2,051,959) 153.4 (2,238,162) 9.1 (2,361,638) 5.5 Maintenance net working capital - - 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - - 4,517,864 7,083,361 10,190,660 11,098,777 8.9 13,671,938 23.2 16,051,483 17.4

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic items at the analysts' judgement. Note: For some companies, the data represents an extract of the full company accounts.

UBS 13

Global Equity Research Americas

Internet Services

12-month rating Buy

12m price target US$720.00

Company profile Google Inc., a technology company, maintains an index of Web sitesand other online content for users, advertisers, Google networkmembers, and other content providers. Its automated searchtechnology helps users obtain instant access to relevant informationfrom its online index. The company provides targeted advertising andInternet search solutions, as well as intranet solutions via anenterprise search appliance.

Value (EV/OpFCF & P/E)

12/08 12/09 12/10 12/11E 12/12E0.0x

5.0x

10.0x

15.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

EV/OpFCF (LHS) P/E (RHS)

Profitability

12/08 12/09 12/10(E) 12/11(E) 12/12(E)49.00%

50.00%

51.00%

52.00%

53.00%

54.00%

55.00%

35.0%

40.0%

45.0%

50.0%

55.0%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/08 12/09 12/10(E) 12/11(E) 12/12(E)19.00%

20.00%

21.00%

22.00%

23.00%

24.00%

25.00%

2.0x

2.5x

3.0x

3.5x

4.0x

ROE (LHS) Price to book value (RHS)

Growth (UBS EPS)

12/08 12/09 12/10(E) 12/11(E) 12/12(E)10000000

15000000

20000000

25000000

30000000

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

Revenue (LHS) UBS EPS Growth (RHS)

Google Inc.

Valuation (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EP/E (local GAAP) - 34.5 21.7 22.2 18.9 16.0 P/E (UBS) - 23.5 19.1 19.8 17.0 14.6 P/CEPS - 18.7 15.6 17.0 14.0 12.1 Net dividend yield (%) - 0.0 0.0 0.0 0.0 0.0 P/BV - 3.9 3.9 4.0 3.2 2.6 EV/revenue (core) - 6.5 5.6 5.9 5.0 4.4 EV/EBITDA (core) - 10.9 8.9 9.9 8.2 7.1 EV/EBIT (core) - 13.0 10.3 11.1 9.5 8.1 EV/OpFCF (core) - 14.5 9.6 11.7 9.5 8.1 EV/op. invested capital - 5.9 4.3 4.6 4.3 4.3

Enterprise value (US$k) 12/08 12/09 12/10E 12/11E 12/12EAverage market cap 110,507,5 105,545,8 137,686,1 137,686,1 137,686,1+ minority interests 0 0 0 0 0 + average net debt (cash) (7,369,133

)(7,369,133

)(7,369,133

)(7,369,133

)(7,369,133

)+ pension obligations and other 0 0 0 0 0 - non-core asset value (85,160) (128,977) (485,000) (485,000) (485,000) Core enterprise value 103,053,3 98,047,69 129,832,0 129,832,0 129,832,0 Growth (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12ERevenue - 36.0 10.2 24.9 18.1 14.4 EBITDA (UBS) - 36.4 16.5 19.5 21.0 15.7 EBIT (UBS) - 33.4 19.3 23.8 16.9 16.5 EPS (UBS) - 26.2 16.8 25.2 16.4 16.6 Cash EPS - 30.7 13.7 19.7 21.4 15.6 Net DPS - - - - - - BVPS - 22.8 -4.0 26.1 24.7 22.3

Margins (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EEBITDA / revenue - 59.5 62.9 60.2 61.7 62.4 EBIT / revenue - 50.1 54.2 53.7 53.2 54.2 Net profit (UBS) / revenue - 39.6 42.4 42.8 42.2 43.1

Return on capital (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EBIT ROIC (UBS) - 45.3 42.0 41.8 45.2 53.4 ROIC post tax - 34.5 32.6 32.4 34.8 41.0 Net ROE - 24.7 23.1 22.8 21.2 20.0

Coverage ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EBIT / net interest - - - - - - Dividend cover (UBS EPS) - - - - - - Div. payout ratio (%, UBS EPS) - - - - - - Net debt / EBITDA - NM NM NM NM NM

Efficiency ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E Revenue / op. invested capital - 0.9 0.8 0.8 0.9 1.0 Revenue / fixed assets - 1.8 1.6 1.9 2.0 2.3 Revenue / net working capital - 1.7 1.4 1.3 1.4 1.6

Investment ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E OpFCF / EBIT - 0.9 1.1 0.9 1.0 1.0 Capex / revenue (%) - 14.9 4.6 9.4 8.7 8.0 Capex / depreciation - 1.6 0.5 1.4 1.0 1.0

Capital structure (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E Net debt / total equity - (30.7) (28.3) (32.4) (46.2) (57.0) Net debt / (net debt + equity) - (44.2) (39.5) (48.0) (85.8) NM Net debt (core) / EV - (7.2) (7.5) (5.7) (5.7) (5.7)

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic items at the analysts' judgement. Valuations: based on an average share price that year, (E): based on a share price of US$573.00 on 03 Dec 2010 19:38 EST Market cap(E) may include forecast share issues/buybacks. Brian Pitz Analyst [email protected] +1-212-713 9310

Brian Fitzgerald Analyst [email protected] +1-212-713 2851

Kaizad Gotla, CFA Associate Analyst [email protected] +1-212-713 2603


UBS 14

Google Inc.

Google Inc., a technology company, maintains an index of Web sites and other online content for users, advertisers, Google network members, and other content providers. Its automated search technology helps users obtain instant access to relevant information from its online index. The company provides targeted advertising and Internet search solutions, as well as intranet solutions via an enterprise search appliance.

Statement of Risk

Google generates the majority of its revenue from online advertising. Online advertising is a relatively new industry. There is risk that the industry could fail to grow for a variety of reasons. Google also faces significant competition for advertising dollars from Yahoo!, Microsoft, AOL, Baidu, and other regional search companies. In addition, Google has been the subject of regulatory scrutiny in the US and Europe, which could stifle innovation at the company over the long term.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 15

Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request.

UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 51% 37%Neutral Hold/Neutral 40% 33%Sell Sell 9% 22%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 20%Sell Sell less than 1% 0%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 September 2010. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 16

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities LLC: Brian Pitz; Brian Fitzgerald; Kaizad Gotla, CFA. Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Google Inc.6a, 6b, 7, 16 GOOG.O Buy N/A US$573.00 03 Dec 2010

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment

banking securities-related services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities

services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than

investment banking services from this company/entity. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.


UBS 17

Google Inc. (US$)

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Price Target (US$) Stock Price (US$)

Buy 2Neutral 2

BuyNo Rating

Source: UBS; as of 03 Dec 2010 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.


UBS 18

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