Z| Ly is| | | S fe} ir Capital Markets iets September 30, 2021 Amazon.com, Inc. Amazon Shrugged; Initiating at Outperform Our view: AMZNis one ofthe internet's largest true aloha dogs, in our view. ‘The company’s unmatched scale and advantage in vertcalized E-commerce ‘combined with its industry-leading cloud business gives it many shots on {02 for future growth opportunities in new verticals. Our channel checks indicate the burgeoning advertising business in particular has a massive opportunity to drive accretive growth. Regulatory scrutiny is inevitable but carries relatively low risk to long-term equity value, in our view. We establish estimates and initiate coverage at Outperform with a $4,150 PT based on 18.6 EV/our modestly below Street's '23 EBITDA estimates. Key points: Compounding E-commerce growth and share gains. We believe E- commerce broadly remains under penetrated with trillions of dollars ‘of annual spend left to shift online. With Amazon's ubiquitous brand and multiple structural advantages of the greatest inventory selection, ‘customer loyalty and an increasingly comprehensive fulfillment strategy, wwe think years of growth and likely share gains lay ahead which can drive further compounding scale advantages, margin expansion, earnings growth and rising optionalty into new agjacent verticals The ultimate platform play. With low-hanging horizontal E-commerce a the foundation, Prime, AWS, and advertising provide Amazon unprecedentedly open access to large incremental markets such as media/ advertising, gaming, nancial services and healthcare, among others. ‘Checks highlight Amazon advertising is early days & under-penetrated. Feedback from 12 ad industry contacts was surprisingly negative on AMZN not because they aren't growing share but arguably because they've seemingly grown too fast. We believe performance and measurabilty are considered somewhat sub-par vs. the industry, channel conflict need some working out and performance-centric advertisers are hesitant/ uncertain about levering their businesses to Amazon given its perceived potential to compete. While inferring negative checks as bulish may seem counterintuitive, we take what we heard as a reflection of the company having room for improvement while possessing superior engineering horsepower and a deep and wide date moat to drive improvement to all three friction points mentioned earlier. We view regulatory risk as low. We think the digital era allows for Unique connectivity and mutually beneficial partnerships that seem either unlikely, or at the very least, extraordinarily difficult to disageregate (for ‘example, Amazon's consumer and enterprise businesses). Additionally, regulators arbitrarily limiting a single company’s particular business unit's abilty to fund another would create an almost unthinkable precedent for global enterprise's desire tore-invest profits into any incremental business ‘opportunity Valuation compelling at 15x EV/'23E EBITDA with COVID deceleration, ‘expense miss/guidance now largely out of the way. We forecast revenue growth to be 23/18/17% in ‘21-23 and EBITDA margins of 16/16/17% through the same period. ‘Brad Erickson Analyst) (503) 830-9488, brad erickson @rbeem com Daniel Par (Associate) (646) 618-096, ciel par@rbeem.com Outperform NASDAQ: AMZN; USD 3,301.12 Price Target USD 4,150.00 Scenario Analysis* Downside current 41% ta tI Key Statistics Sores OS|MME——SLAD. Maat Capi 686.776 hacen 000 ld om ont) 2765 rere vu: 2083405 Jog Daly Votume: 3000481 RBC Estimates Fy Dee 2020A 201 20 20236 Revenue 386,068.0475,7840 5614903 654004 eeTDA, Ad) 87,2880 72.9823 90,5078 112.3758 Revenue a @ a a 2000 75,452.08 88,912.08 96,145.0825, 555.0 2021 108/518.013,080 081,320 4642,255 6 2022 124,643 1832,762 8834 264 4865820 08 EBITDA, Ad 2020 11,178.08 18 462.0815 067.08 16,557.08 2001 438,717.08 193420€ 17,055 3¢ 178680 2022 21,687 3 23,00 7E 22,029 8E 22989 96Copital Markets LS, Key fundamental questions ‘Can Amazon gain share over the next 3-5 years in E-commerce? Can Amazon drive material disruption the largest competitors in \e advertising? Would some type of a break-up be bad or good for the stock? Would it matter September 30, 2021 ‘Amazon.com, Inc. ‘Our view ‘We think so. Given the emergence of restaurant and grocery delivery providers, ‘we think these types of industries which have exploded since Covid have ramped ‘consumer expectations significantly around shipping times where we believe strongly that American consumers in particular are especially elastic to shipping times. Given the initiatives both in the U.S. and around the world to reduce ship times, we see this as a key tool in driving conversion and leading to higher-than- market E-commerce share gains. Amazingly one-day shipping for Prime has been available in the U.S. for over two years for a full catalog of products while certain ‘countries are presently building out that capability on an expanding catalog. The pandemic did impede the company's ability to catch up with demand for one day in the U.S. but we think the recent hiring announcements signal that these capacity constraints shauld be addressed by the early part of next year. Finally, we're most intrigued at the company's expansion of same-day now to 12 cities with 1 to 2 hour grocery to more closely compete with UBER, DASH and Instacart. Lastly, given over '55% of the company’s 3P sales are leveraging FBA and continues rising, we view this, 2s reinforcing that 3P sellers recognize the need to offer fast shipping and would ‘expect this accretive part of the business to continue to flourish, Potentially. Advertisers generally are intrigued at using Amazon given the perception. Of having the most vast 1P trove of data for targeting, That said, in particular, we see two key developments where the company must make strides in order for this to happen based on our checks. First, the company needs to continue to instill 2 look, feel and reputation for increasingly being the top of the funnel for any down- funnel product or service search, While no one can deny the intent on Amazon is ‘meaningfully higher than Google, however, we know Google stil wins that battle for both structural and perception-related reasons. Secondarily, based on our checks, ‘we think the company needs to work on its algorithms in order to drive conversion, ‘We believe the company is still honing what purchase habits should warrant the right ads where advertiser feedback suggested the ads were being shown at the ‘wrong times and conversion was actually sub-standard vs. Google or even Facebook, in some cases. Allin, we believe the vast amount of purchase activity gives AMZN ‘a distinct advantage vs. any top-of-funnel search engine, and we have to think the ‘matching algorithm should improve with time. We'd think it wouldn't matter too much and that some sort of consumer/enterprise split would likely continue being owned by the same shareholders. We recognize ‘that AWS's strong margins and cash flow obviously fund other areas of the business ‘where 1P's margins in particular remain low-single digits, however, we think the ‘combination of 3P's ramping volumes and highly accretive margins would offset this ‘and any capital shortfall could be quickly addressed. Additionally after talking with the company, we came away feeling more confident that there is a clear tech and ‘engineering divide between AWS and the consumer business. We'd wondered ifone pulled from the other and/or whether AWS's margins might reflect some drafting cof overhead - we do not believe to be the case and thus, separated companies nel uhinepemsensmemes 3:Copital Markets LS, Can the company maintain at least 115% growth and margin expansion over the next 3-5 years? September 30, 2021 ‘Amazon.com, Inc. P&L's would be virtually identical to the current segment operating income reporting disclosure. In-line with our thinking both around cloud's ability to maintain fast growth along. with ongoing E-commerce share gains, we think so. We expect multiple accretive rivers over the next several years with advertising ramping, strong cloud growth and 3P growth faster than 1P. Given the trillions of offiine retail dollars we see moving online over the much longer-term and Amazon's leadership position/ superior fulfillment, we see no reason why 15% or even faster growth isn’t possible ‘over the next 35 years. Brad Erickson (500) 280-5488; bradoridsen@rbcemcom 3Copital Markets LS, Key ESG questions ‘Amazon.com, Inc. This section i intended to highlight key ESG discussion points relevont to this company, as well 9s our views on the outlook. Both the questions we highfight and our responses will evolve overtime asthe dialogue between management, anolysts and investors continues to advance, We welcome any feedback on the topics. What are the most material ESG issues facing this company? Does the company integrate ESG considerations into its strategy? ‘What is diversity like at board / ‘management level? September 30, 2021 ‘Our view ‘The company possesses hundreds of millions of user's personal and payment information; thus, data security & privacy are critical. We estimate the company is closing in on 1.5 million global employees and thus, faces a number of employee relations challenges given its uniquely large scale. The company’s fulfillment ‘operations consume a great amount of resources, particularly transportation and packaging-related, Absolutely. Similar to its mega-cap peers, the company has an entire business Unit devoted to ESG strategy and implementation. In particular, the company's stated focus is heavily around its climate pledge towards a 2040 net-zero carbon Initiative, sustainable operations given the company’s vast physical footprint, supply chain given the enormous amount of personnel performing physical labor and improvement to packaging and waste given the volume of shipments the company ‘executes each year. 14% of the company's executive management team are female. 42% of the ‘company's board of directors are female. eelubieipesensmee 4Copital Markets ile September 30, 2021 ‘Amazon.com, Inc. Comparable Valuations Bre: 35 ened negSaae Fem ysss 55 8yasssgygyyy geass Advertising Industry Channel checks We spoke to a dozen agency and corporate performance marketing channel contacts for o broad perspective around all of the major ad channels including Google/YouTube, Facebook/Instagram, ‘Amazon/Prime Video/CTV, Snap, Pinterest, and TiKTOk, Facebook/Instagram: Everyone we spoke tos losing signal on FB in particular and the industry has only just begun figuring out what to do about it -ie., we detected very little if any change in spending. Consensus feedback indicated that most advertisers are lasing signal with platforms ‘where there's meaningful value garnered from view-through conversions or app-installs-namely FB, We came away feeling like performance has likely fallen in the eyes of advertisers but given it's not yet quantifiable, advertisers have nat really changed their spend as Facebook properties are viewed as unparalleled in terms of targeting with or without IDFA. Relative to the 15% under- reporting Facebook recently disclosed, we heard a wide range bracketing this figure of between 10% and 50% signal loss. Ultimately, we have to think that the performance loss could become ‘a headwind, which is the thinking with our slightly below-Street estimates. If spending were to leave Facebook, YouTube and CTV are the top two channels as next-best alternatives. We intend to continue to monitor the channel for indications that the performance declines are translating to adverse spending changes. Google/YouTube: No news is good news unless it's about YouTube, which appears to be the largest share gainer in the industry. Given all the controversy surrounding Apple's IDFA ‘changes, feedback on Google spend seemed remarkably inline with YouTube feedback sounding incredibly bullish. In our view, Google remains the gold-standard for finding high-intent, relatively further-down-in-the-funnel customers. Interestingly, we came away finding that most ‘companies we spoke with spend significantly more with either Google or Facebook, but generally not both. As such, when we inquired as to whether presumptive IDFA headwinds could actually benefit Google at some point, aside from maybe YouTube, the answer was largely no. In terms Of core Google CPC commentary, the view has been and remains that scaling spend on Google beyond a certain point is challenging at times due to competition, however, due to its relative Brad Erickson (308) 290-5008; bred.ericioong@recem.com 5Copital Markets LS, September 30, 2021 ‘Amazon.com, Inc. effectiveness & strong conversion vs. any ather channel, this competition is what drives the ‘ongoing CPC inflation and is simply a necessary evil that everyone in the industry must live with. Finally, we did hear of certain recent Al-based changes to Google self-serve platform on AdWords where the view was is intended to help smaller advertisers compete against those leveraging agency targeting tools. We didn't detect it as having been in the market long enough to have driven real change yet, but feedback indicated that this could cause some consternation among, the agency community, For YouTube, nearly every respondent had favorable commentary where YouTube's sheer size (over 28 monthly users) seemed to largely instruct that view along with being the most clearly perceived rising engagement channel in the industry. AS such, we expect YouTube's growth and share gains as likely to continue outpacing others in the industry. Given the tie-in with Google's search data, conversion has been better than expected for marketers, which hasinvited incremental testing, and given video seemed to be most advertisers' top priority for content, YouTube is capturing disproportionate share given it can handle differentiated scale vs. other video-based platforms. Amazon/CTV: Feedback was surprisingly negative on AMZN - not because it isn't growing share but arguably because it's almost grown too fast. For the sponsored brand/display advertising business, we believe performance and measurability are considered somewhat sub-par vs. the industry despite Amazon's 1P data advantage, channel conflict seems to need some working ‘out and some performance-centric advertisers where there could be product crossover are somewhat hesitant/uncertain about levering their businesses to Amazon given its universally perceived potential to compete, While inferring seemingly negative checks as bullish may seem counterintuitive, we take what we heard as a reflection of the company having a variety of ‘opportunities for improvement while possessing superior engineering horsepower and a deep ‘and wide data moat to drive improvement to all three aforementioned friction points in the future. In particular, given the strong and growing amount of 1P data the company generates from its core E-commerce business, we expect its reporting and measurement tools, along with algorithms to drive conversion, have nowhere to go but up over time, which should benefit the platform. On channel conflict, while again, there's likely years of algorithm tweaking that may reed to occur in order to appropriately incentivize 3P sellers to use adequate fulfillment, we see the value proposition of ultimately driving more volume and adoption through Amazon and FBA as likely and fueling the share gains we expect out of Amazon's core E-commerce business, Regarding Amazon's play in CTV, we believe the opportunity to monetize across streaming platforms, and ultimately through its increasingly tight hardware & software integration, is attractive. Based on our conversations with the company, we expect the medium-term strategy to reflect clear mindfulness around not aver-clurtering the user experience given competitors’ user experiences. That said, given the company's clear path towards content creation and accumulation, particularly live sports, with the exception of YouTube, we don't see another platform able to introduce a similarly sized audience as the hundreds of millions of Prime users. SNAP: Feedback was more mixed vs. the larger platforms. Positively, we didn’t detect really any consternation related to Apple's IDFA changes as SNAP tends to be viewed as higher in the funnel vs. FB, and thus measurement around conversion doesn't tend to be scrutinized as much Additionally, with advertisers seeking younger customers, SNAP has @ solid foothold with that, spend with solid conversion where the feedback around the self-serve platform and reporting ‘suggested the company’s made big strides of improvement over the past year or two. Finally, because of SNAP's messaging-centric platform and ephemeral content tending to build an image of privacy in the eyes ofits users (meaning privacy from parents & relatives mostly), advertisers «generally believe that this has made the platform's younger user base stickier than advertisers might have expected a few years ago and, in our minds, could potentially allow for product & nelubienpesennmee ©Copital Markets LS, September 30, 2021 ‘Amazon.com, Inc. vertical market expansion over time to the degree that those millennials/Gen Z's continue to age up and their consumer preferences naturally evolve, Looking a bit further out, we did detect some cross-currents worth monitoring in our channel ‘checks. A few important things stuck out to us that seemed somewhat off-consensus: 1) SNAP's attractive messaging-centric value prop to its relatively younger user base makes it more limited to address the range of advertisers where its visual/brand-based heritage means the creative content bar is higher to get over for newer advertisers. 2) While we know DR is improving, conversion feedback was quite mixed vs. other platforms suggesting SNAP remains further up the funnel even vs. TikTok and even further away from Instagram. 3) Spotlight seemed to be a bit of a non-starter for advertisers we spoke to where we think SL needs to ‘work’ for the stock to sustainably re-rate - we wonder if the content creator flywheel may lack incentive and ultimately limits the user base expansion potential. 4) We believe TikTok is the shiny new toy in the space, and we believe itis gaining the most share while already exhibiting better conversion and reporting analytics vs. SNAP. PINS: Feedback was also fairly mixed. Positively, if products/services were for a roughly older- than-Gen Z/younger millennial demographic, targeting and conversion were viewed as generally solid. Related to IDFA, PINS is viewed as being less exposed due to being meaningfully higher in the funnel vs. FB and the fact its targeting relies much more on content matching (keyword category searches) vs. audience matching Less positively, PINS's tighter demographics appear to be limiting the addressable advertiser base and targetability where it was noted that often, PINS is simply not as effective as FB due to FB having the nearly 100% crossover with PINS demographically. To this point, we think advertisers face a difficult channel leverage choice when looking to spend on PINS vs. FB given the audience size differential (PINS has <100M MAUs in the US. vs. FB ~260M). Additionally, we believe measurement has and remains a challenge for PINS, which defaults to view-through conversion vs. click-based conversion and thus, tends to struggle sometimes to prove attribution vs. FB given the same user may have seen the ad on both platforms prior to converting. Establishing estimates. We are establishing estimates with growth remaining strong across ‘multiple vectors; namely 3P seller services, subscription services, advertising, and AWS. With growth from these businesses outpacing Amazon's 1P online retail and physical store revenue growth, we believe incremental mix-shift towards these higher margin Amazon sub-segments should instruct continued EBITDA margin expansion for the overall business. Notably, we continue to monitor Amazon's ability to further penetrate the digital advertising market as its leading 1P signal and vast content catalog positions the company to take share in the post IDFA world, which we believe could drive upside to revenue as well as further EBITDA margin ‘expansion. We forecast revenue growth to be 23/18/17% in ‘21-23 and EBITDA margins of 15/16/17% through the same period. neluhinepesennme TCapital ‘Amazon.com Ine. Markets ike Exhibit stablishing Estimates Seon ne) oo Coad pz PIyry Revenue] $111,920 $142,266 | $475,784 | $561,490 | $654,400 old] - : - : Adjusted EBITDA] $17,055 $17,868 | $72,982 | $90,608 | $112,376 ols|___- - September 30, 2021 Brad Erickson (500) 20-5088; bradoridsen@rbcemcom 8Sector Strategy Overview Capital MarketsWhere the internet is going Internet 1.0 i 1 T Early 2000's 1990 to Early 2000's - Land Grab: Adoption & eyeballs were good enough. Source: RBC Capital Markets Internet 2.0 Early 2000's to 2013 - Form Habits: Expand to all categories. Exploration ofall verticals teaches what will be easy or hard for the internet to colonize. T 2013 Internet 3.0 1 T Future 2013 to Present - Monetize or Else: Confluence of smartphone maturity and access to capital fuels competition, drivers higher CAC and creates existential need to own the customer, thus funnel migration. >Funnel migration — the pervasive trend going on right now across the internet space een k ere ae ANGI, CARG, CARS, FB, GOOGL, PINS, SNAP, TRIP, TRUE, ZG Top of Funnel Discovery + Objective is to be huge (traffic), nothing else matters + ANGI, CARG, CARS, FB, GOOGL, PINS, SNAP, TRIP, TRUE, YELP, 2G Mid-Funnel Research, Price + Can user take what they've eae Comparison, Shopping leaned off-platform (or offline completely)? Bottom of Funnel * Conversion = Monetization + Data AMZN, CHWY, CVNA, DASH, FVRR, LYFT, MELI, RDFN, UBER, UPWK, W Conversion + ABNB, AMZN, BKNG, CHWY, CVNA, DASH, EXPE, FVRR, LYFT, MELI, OPEN, RDFN, UBER, UPWK, W Source: RBC Capital MarketsWhat's Happening by Vertical? Discovery Dene Re oc co med Down Aiea ‘Ads/Social Mixed Car Retail Mixed Consumer trust Home/Local Low Real Estate High Research, Price ‘omparison, Shopping Dating Low Delivery Mixed E-Commerce High Audience Size Gaming Mixed Pro. Services Mixed Conversion Travel Low Source: RBC Capital MarketsEveryone's trying to build a platform — expanding customers’ wallet E-Commerce Professional Services $1.2T fiverr. Rpt intuit zg Brevoron Apparel and Services $1.0T Google FE Microsoft ing @ Search/Mapping Food $1.5T Real Estate $2.5T Angi Reorm Z a Pech tone so) MET2 — ‘ays ome buceil ‘Consumer Spending — 2/3 of $217 US GDP Coc Crpse Travel $700B Healthcare $3.8T Education $4008 Source: Company Reports, RBC Capital Markets, US Census Bureau, USTravel.Org Mobile (Devices and Ecosystem) Entertainment $350B Transportation $1.8T Uber Wyk a vroom Q via SHIFT Ls | Hinge japon — Dating >$8B Google € amazon SAMSUNGSearching for the next WeChat + WeChat out of China (owned by Tencent) is the mode! that everyone is shooting for with 1.258 users, = 900M credit cards 3.2M merchants Integrated functionality including — Comprehensive messaging Search Location services Banking & financial services — Digital walletP2P/P2E payments — Social media Physical and digital commerce tools — Food & grocery delivery ~ Utilities biting Online travel Shared mobilty (transportation) — Entertainment & media — Online real estate ~ CRM — Enterprise communication suite = Why haven't North American and European consumers adopted a super-app? — Mobile wasn't our first interaction with the intemet — We don't like to “be watched” ~ We are well-banked — Companies are smart — no one will take the first leap — Only thing that would change this is inertia of specific platform from SMB sellers me hues E-Commerce Payments Devices amazon prime (@ WhatsApp Uber nce Or Source: Company reports, QPSoftware.com, RBC Capital MarketsWhere does Mega-Tech want to go? Very nearly everywhere és amazon @ Nl siey erate’ NS ter E-Commerce Search/Maps tesa) #1 Player AMZN ‘AAPL FB ‘GOOGL Core Platform| Prime ios Messenger/WhatsApp Google Account Me Healthcare v. v. v v Food v Transportation v v v Search/Ads| v v v v Entertainment v v v v Real Estate ‘Automotive v v Travel v Education v v v v ‘Apparel/Services v v v Gaming v v v Dating Source: Company reports, RBC Capital MarketsDigital Advertising, E-commerce, Cloud Market Opportunities Capital MarketsGlobal digital advertising TAM (incl. China) — $478 billion and incrementally growing = Two key drivers: e-commerce and new business formation = Offline hasn't really declined much — much of digital’s growth has been incremental $700,000 ‘$600,000 $500,000 Revenue ($MM) $400,000 $300,000 $200,000 $100,000 $0 $339,616 $383,922 $478,415 $539,512 $583,524 $636,605 2019 2020 2021 2022 2023 2024 Source: M Group, Company filings, RBC Capital Markets 70.0% i 8 3 Digital Share of Global Advertising Market g ; 3 10.0% 0.0% == Outdoor Digital Cinema ces Magazines j= Newspapers en Audio smn TV / Pro. Video Digital ShareDigital advertising TAM = Estimate global digital ad spend ex. China will grow ‘$500,000 ata 14% 5-Year CAGR to ~$450B by 2024. @ $450,000 & $200,000 = Search spend ex. China growth slower than overall 3 $350,000 but still strong at ~10% CAGR through 2024. i $300,000 Ey con = Estimate U.S. ad spend to grow modestly faster $200,000 than International ex. China, though remain slightly 3 $150,000 below in terms of overall digital ad spend. j ‘$100,000 © $50,000 30 2019 © 2020» 202120222023 2024 Global Search Ad Spend ex. China vs. Global Non-Search Ad Spend ex. China Forecast, 2019-2024E $250,000 , = $450,000 = $200,000 S $400,000 a S008 $150,000 |, ooo i 5 $250,000 $100,000 28 s200000 3 5150,000 $50,000, | 3 $100,000 50,000 0 i” 2019 2020 2021 2022 2023 Global Digital Ad Spend ex. China Global 2019 ©2020-2021 2023 ©2024 = Digital-US Digital - International Ex-China Search ex.China = Non-Search ex. China Source: M Group, Company filings, RBC Capital MarketsHigh-correlation between e-commerce and digital ad spend = Historically, digital advertising Digital Advertising Spend Relative to Retail E-Commerce GMV ~ Consistently at ~10% spend relative to e-commerce $7,000 12.0% GMV has hovered around 10% $6,000 — = We expect global retail e-commerce & market to grow ~$L.ST from 2021to $5 ina 2024 = g i 5 B $4,000 ts —Implies baseline of ~$150B of eT em Of incremental digital advertising Tsao e spend a ¢ 4.0% uv — As much as ~$1,5-$2T of $2,000 j implied equity value creation 3 $1,000 fe i » = a a a a | 2019 2020 2o21E 20226 20236 20245 Digital Advertising» E-Commerce Source: M Group, Company filings, RBC Capital Markets estimatesVCs and tech start-ups are huge LT tailwinds for ad spend going forward = We believe ~$0.40 of every $1 of venture capital raised for virtually all consumer companies will be spent on digital advertising. : a Brick and Mortar Retail Advertising Spend as a % of Revenue (as ® Legacy consumer companies spend <2% of revenue on ‘of FY2019 as we consider COVID nuances] advertising. 9 ‘sis 33% : ‘ee ons stlase a i ici so 45% 1s9 = Sample of public internets spending ~12% on digital ads $840 19% $500 — Net revenue marketplaces frequently spend 25-50% Sis ay sors $637 42% i683 suits 18 sm10.25 : i ‘isn 20% 15.32 = Relative to $14T consumer TAM in the U.S. — every 100 bps 3854 or $122,286 of the gap is worth $140B of incremental digital spend a Fy oa — ~30% incremental relative to 2021 Rost $14 osm $16,039 1st siser 21% sreaiz aK ‘sis 1s sony $180 40% uta saa 43% 7.398 0 ly get tag SB ¢—$§_S5, 8 E-commerce Retail Advertising Spend as a % of Revenue (as of aca a ® FY2019 as we consider COVID nuances, netbe a5 0% 7 uae 2s 4 E eve coptat air oo tie dio & tovested eM 204 52% $390 im0 3 Eoar s1400 0% 10800 erst 175 20% 218 ¥ seo ee ciel ren pad ane ior . FrOW $303 166% sas 15% ‘Company REAL sa 27% S38 $60 ‘Ad Spend ‘Sra 68 98% sum & w s.086 12.05 sa. ts 10% i Weighted Average $3,079 a7 ‘h05r $20 3% 5 $0 0% 2016 = 2017,—S 201820192020 Source: Company filings, RBC Capital MarketsThe four determinants of success for digital advertising Intent — Why are your users really there? What are they trying to do? 1.AMZN 2.GOOGL 3. FB 4. PINS 5. SNAP First-party data quality — how much do you know about your user (deterministic or probabilistic)? 1.AMZN 2.FB 3. GOOGL 4, PINS 5. SNAP Demographic width — Are your users interested in all types of products or only some? 1.FB 2. GOOGL 3. AMZN 4, SNAP 5. PINS Audience size — limited size drives limited spend leading to limited equity value creation. 1.GOOGL 2.FB 3. AMZN 4, PINS 5. SNAPDigital advertising funnel positioning Funnel Top TikTok Demographics Narrow amazon — Bottom Source: RBC Capital MarketsE-commerce penetration going ever higher from 20% = COVID has created new level of customer expectation on timing, highlighting ever-present shipping elasticity. = AMZN making critical investments in logistics and fulfillment, working towards same-day and on- demand. = Europe remains particularly underpenetrated. — Prime: F1, Premier League, other live sports Global Retail E-Commerce Forecast 2019-2024 ($B) $7,000 rh ae aso eco Coe a a | : i BE i Global Retail E-commerce Spend ($B) 2019 © -2020»«-2021E ©» 2022E«2023E-(2024E Global Retail Forecast 2019-2024E ($B: $35,000 25% % § $30,000 oe t Tieee a lam fy | a fF 2 $22,092 $22,915 i $15,000 521,308 $19,499 $20,191 $2414 10% 8 4 noe i 3 5% 60 $5,000 a 908 $6,388 hs a s4go1 $5424 $5,908 $6.3 2 2019 2020 20218 20228 2023 20248 ECommerce ===Offline E-Commerce Penetration US Retail $1,600 $1,400 $1,200 3 US E-Commerce Spend ($8) 2019 ©2020 «2021E ©2022) 2023E 20248. Source: eMarketer, Oberlo, RBC Capital MarketsWe believe AMZN share gains can continue = Amazon e-commerce opportunity: —We estimate Amazon is ~<40% of U.S. e- commerce, 20% of global e-commerce ex.China —As of April 2021, Amazon Prime has over 200M subscriptions globally, with an estimated ~75/25 Top 10 1.5. E-Commerce Retailers, U.S. vs. International split en Walmart sss eBay a = Europe provides the most compelling untapped Apple IF market for Amazon to make in-roads, in our view BestBuy Gy —Implied <10% Prime membership penetration of Target 2021 EU population (26% of EU households) vs. Home Depot i neers ~45% penetration of the US population Kroger i Costco Wholesale Wayfair —EU GDP is $15.6T, assuming ~60% is $0 $50. $100 $150 $200 $250 $200 $350 $400 consumer, every 100 bps of share gains is E-Commerce Sales ($B) ~$94B of incremental GMV —As EU platform grows, will accelerate advertising opportunity Assuming a 10% advertising spend to GMV, every 100 bps of E-commerce penetration could drive ~$190B of equity value creationWhere's the outsized growth going to come from in e-commerce? US Retail E-commerce Penetration by Product Books, music & vicoo __SSSEEESSSS ESS ESSE ESS SESS Computer & consumer electrics Rca Office equipment 6 spe: Bierce Apparel & accessories Furniture & home furnishings III Health, personal care & beauty Auto & parts Food & beverage 0% 2x 30% 40% 50% 60% 70% ——— 5 Retail E-Commerce Sales by Product Category ee Source: eMarketer, RBC Capital MarketsCloud TAM: still only ~10% penetrated relative to global IT spend ex-devices Leading Clou rs by Sub Vertical A stable oligopoly Doffcexss acoura G Suite aeslack “~~ GP @sucarcam = AMZN: AWS the clear & long-time leader in public g@ eo ea) cloud ~ Most comprehensive product portfolio — Has led in core laaS market, which is the fastest growing sub-category within cloud spending — We forecast '22E AWS revenue of ~$77B * MSFT: Azure has leveraged huge existing large enterprise rolodex ode -2025E ($MM) ~ Product suite behind AMZN, but well ahead of (Giga Cloud Forecast 2019-20255 (SMM) GOOGL analytics, however we expect the company to ‘$300,000 $270,033 remain a distant third in the cloud oligopoly $242,698. ~ We forecast '22E GCP revenue of ~$26B ern 100,000 $0 Revenue ($MM) ~— We forecast '22E Azure revenue of ~$50B ee % Cove $583,526 = GOOGL: Google Cloud Platform (GCP) lacks $481,902 bass product depth but deep analytics ‘sso0e00 - ae — We like Google to win share where its solution 'g $400,000 $397,496 setis positioned well with G Suite and its deep $332,349 Ly any 2019 2020» 2021E © 2022E-«-2023E ©2024 ©—2025E Note: MSFT covered by RBC Capital Markets analyst Rishi J aluria Source: Gartner, Kinsta, RBC Capital MarketsCloud forecast by vendors, which platform wins at what = We forecast Azure to gain some share vs. AMZN, though still remaining meaningfully behind AWS absolute revenue levels = Google Cloud a close second on growth — AWS a close second on share gains RBC Mega Tech Cloud Revenue Forecast $180,000 capa $160,000 aa ae $116,552 $120,000 $100,000 $83,373 $80,000 560,507 $360,000 $40,000 $20,000 $0 2019 2020 20216 20226 SAWS Azure «Google Cloud REC Cloud Forecast (SMM) EcSC a (1S laws $35,026 $45,370 $60,491 $76,709 lAzure $16,563 $24,944 $36,791 $50,043 IGoogle Cloud $8,918 $13,059 $19,270 _ $26,424 [Total Mega Tech Cloud 360,507 $83,373 $116,552 $153,177 Frotal Cloud ex. China $228,933 $251,412 $305,563 $362,769, laws yiy 30% 3% 27% lazure yly 51% 47% 36% [Googie Cloud yiy 46% 48% 37% [Total Mega Tech Cloud yly 38% = 40% = 31% JAWS as a % oftotal cloud ex. China 1% 18% 20% 21% JAzure as a % of total cloud ex. China 7% 10% = 12% [Googie Cloud as a % of total cloud ex. China 4% 5% 6% 7% [Total Mega Tech Cloud as a % of total cloud ex. China 26% 33% 38% A Note: MSFT covered by RBC Capital Markets analyst Rishi | aluria Source: Gartner, RBC Capital Markets estimatesControversy and Channel Checks Capital MarketsBiggest controversy in online advertising: Signal loss = Apple's late-Q2 rollout of (0S 14.5 including App Tracking Transparency (ATT) is causing a loss of signal primarily for social players who use data from other apps on iPhone for targeting and campaign measurement/reporting. ~ Identification for advertisers (IDFA): an anonymized unique identifier on all iPhones (Android has its own as well) that allows an app developer to see what happens on other apps on your phone. — We view this as a sign that Apple may want to compete in global advertising Best positioned pre-ATT = So what do app developers like FB lose? — The ability to track off-platform activity Google — The loss of view-through conversions on mobile devices (mainly impacting re- targeting) — Loss of attribution for campaign-driven app downloads = With app tracking gone and cookies likely gone in '23/'24, what will advertisers do? — Clear trend away from unique user activity towards targeting based on Al-fueled modeling of anonymized cohort level activity. ~ Google testing its Federated Learning of Cohorts (FLoC) platform — Server-side attribution — Advertiser allows data distribution from its website server to a vendor server using on-site data collection pixels (tags). ~ Targeting based on people like you (probabilistic data) vs. targeting based on your activity (deterministic data) ~ Improves data collection across all channels for better campaign performance measurability = Helps manage tags without degrading user experience —FB, SNAP and PINS either are or will likely promote 1P data tagging with advertisers.The potential advertising share gainers of the future: Amazon...and Apple? = ...and one more thing —- Amazon is testing its own 1P tagging platform. —We believe this could address a key advertiser pain point we detected in our checks ~ As AMZN's ad business grows, so too will the desire for advertisers to share its data with AMZN for better targeting, conversion and ROI... —...which should feed the e-commerce business incrementally — Most important: Amazon already has some of the broadest and best 1P data in the industry in terms of unique user purchasing intent/history. —This addition would only make it stronger. = We think Apple’s user privacy changes reflect a LT desire to enter the advertising market — Apple possesses the world’s highest value user base. = Peat (1.65B devices) in active use as of J an — Can use data privacy as cover while it invests in a search algorithm behind the scenes. ~The trillion dollar question: —What would create more equity value for AAPL — search advertising revenue or Google's traffic acquisition payment? Who could benefit from le’s privacy changes amazon —T 4Channel work — Apple’s App Tracking Transparency (ATT) sends the industry backwards = We spoke to 12 digital advertising channel contacts regarding their use & views of the major digital ad channels (Google, YouTube, Facebook, Instagram, Twitter, Linkedin, Snap, TikTok, Pinterest) = Key takeaways: — FB: Advertisers have no choice but to fly blind (for now) with the loss of signal from Apple. —Advertisers’ perception is that performance is off ~10% though we heard bigger range for reporting loss of 10-50% related to iOS 14 update. — Strangely, we did not find evidence that this has led to meaningful spending churn but will continue monitoring for effects of perceived worse performance. —Most likely alternative if FB were to see spending churn: YouTube or CTV. — GOOGL: Not changing their cookie game until they know they can retain control of it. —Pricing power (ad inflation) continues to amaze the industry as there is no alternative given how much more intentful Google users are considered vs. social channels. ~ YouTube is industry's leading share gainer — differentiated targetability, conversion and scale. —Recent launch of increased Al self-serve tools for SMBs may cause agency consternation. —Recent SEO algorithm change driving very little traffic dislocation. — AMZN: Feedback indicated meaningful pent-up demand — but industry still trying to figure out exactly how to best use Amazon given different data, interfaces & intent vs. other channels. —Hesitance (if any) comes from AMZN being a low trustworthy channel partner.Channel work — Apple’s App Tracking Transparency (ATT) sends the industry backwards = Continued takeaways: —SNAP: Trying to change its spots from being viewed as top-of-funnel and largely selling to kids. —Some exposure to Apple tracking changes but are generally higher up-funnel and thus, measurability not as scrutinized or relied upon as FB. —TikTok’s clearly rising popularity advantage instructs advertisers view that SNAP’s demographic reach remains limited. —SNAP's CPMs viewed as less competitive vs. TikTok with lower conversion suggesting a meaningful ROI gap. ~Early views on Spotlight feedback were nascent/not indicative of driving a demographic shift. —PINS: Higher in the funnel relative to its peer group. —Advertisers not seeing incremental content or product necessary to return to meaningful user growth in U.S. — Displays weakest conversion vs. peers on views of being too high in the funnel, lacking targetability outside of core categories (home, DIY, lifestyle, fitness etc) —Some exposure to Apple tracking change where PINS faces attribution challenges vs. FB/Instagram in particular given virtually 100% user crossover,Regulatory Developments & Thoughts Capital Markets itsLatest regulatory developments Google = Privacy changes to Chrome (Open Web industry group complaint to EU) = Monopolizing search/digital ad practices (Do) probe) = Google’s Android Play Store and app store commission fees (State AG antitrust lawsuit) = Discriminatory conduct on search results page (State AG antitrust lawsuit) = Appeal to overturn EU $5B antitrust fine related to Android = The common break-up debate for Google: Separate Google, YouTube and/or GCP Facebook = Investigations into Facebook's handling of child safety — FTC reportedly looking at updating the 1998 Children’s Online Privacy Protection Act = “Buy or Bury” predatory M&A (FTC investigation) = $5B settlement with the FTC for the Cambridge Analytica scandal (Shareholder lawsuit) = The common break-up debate for Facebook: Separate Facebook, WhatsApp and/or Instagram Amazon = 1P/3P seller agreement practices (State AG antitrust lawsuit) = Amazon acquisition of MGM (FTC review) = Practices to prevent unionization of Amazon workers = The common break-up debate for Amazon: Separate E-commerce, AWS and/or Prime VideoRegulatory decision tree — we see relative risk to equity value as low Daa eur Nothing really ree ech acy Consumers likely Separate company [AAPL tries to compete, AMZN tries to play a adversely impacted would begin land & in GOOGL and FB's role as a streaming Ielative to no breakup) expand all over again core end markets. consolidator reakip model Eee AMZN continues Pins ty to compete Political risk prohibits land & allows land & chasing GOOGL and Bs ty. cone expand FB's core end-market meen Cycle would Would create an & partnerships, Unacceptable unprecedented alliances and outcome impediment to free laffiliate relationships enterprise ‘would quickly materialize Would adversely impact private and books fevely Ga) pulccomeey= | agaes erect so broken up I Unacceptable outcome Source: RBC Capital MarketsCompany Initiation Overview Capital MarketsAmazon.com Inc. (AMZN $3,301.12, Outperform - $1.7T market cap) — PT: $4,150 our view: = AMZN is one of the internet's largest true alpha dogs, in our view. The eka abil company's unmatched scale and advantage in verticalized e-commerce Market Cap ($B) $1,671,821 amazon combined with its industry-leading cloud business gives it many shots on EV ($8) $1,692,672 — goal for future growth opportunities in new verticals. Rating: Outperform * Our channel checks indicate the burgeoning advertising business in Reine 20216 a 2003 particular has a massive opportunity to drive accretive growth. EaEae $75,719 «$563,670 «$658,405 RBC $475,784 $561,490 $654,400 + Regulatory scrutiny is inevitable but carries relatively low risk to long-term equity value, in our view. EBITDA 2021 2022 2023E| Street $72,752 $91,566 $114,986) ie : REC $72,982 90,608 $112,376 + We establish estimates and initiate coverage at Outperform with a $4,150 * PT based on 18.6x EV/our modestly below Street's '23 EBITDA estimate. implied Multiple 20216 20226 20236 Evisales, 3.6x 3.0x 2.6x Key debates: Eviesiroa 24.0x 18.7 15.1 + 1) Can Amazon gain share over the next 3-5 years in e-commerce? con + 2) Can Amazon drive material disruption to the largest competitors in online | $3,500 advertising? $3,000 + 3) Would some type of a break-up be bad or good for the stock? Would it $2,500 matter? oa + 4) Can the company maintain at least 15% growth and margin expansion as over the next 3-5 years? ae $0 Source: Company filings, Factset, RBC Capital Markets estimates