Z| Ly is| | | S fe} ir Capital Markets iets September 30, 2021 Alphabet Inc. An almost unfairly good business; initiating at Outperform ‘Our view: Google earned its place as the gateway to the internet affording it significant advantages and capital to invest in numerous large, important adjacent markets as it searches for incremental areas of future growth While we think regulatory scrutiny is arguably higher vs. peers and sentiment is positive at the moment, we initiate at Outperform given 1) GOOGL's ability to perpetually custom-tallor its down-funnel strategy by vertical for maximum equity value creation, and 2) our bullish checks on core search's long-term pricing power alongside clear YouTube share gains. Initiate at Outperform; setting $3,400 PT based on 16.5x EV/'23E EBITDA. Key points: Unparalleled top-of-funnel dominance feeds maximum optionality. With the proceeds from its dominant position in core search, we believe Alphabet is in an almost unmatched position to invest into some of humanity's largest and most important verticals such as wireless broadband democratization, transportation, urban planning and population health/healthcare, among others. In the context of our down- funnel internet thesis, we believe Google funnel-width positioning gives it ‘a unique ability to capture down-funnel data at accretive margins while ‘Feeding its search algorithm to drive virtually perpetual CPC inflation Google ad checks: pricing power, YouTube and no real signal loss. In talking with a dozen advertising contacts, we believe Google remains the foundational first dollar of spend for any digital strategy. We know of no other platform that offers the combination of large top-of-funnel traffic combined with down-funnel intent. As such, we believe Google's pricing power through CPC inflation is likely to remain strong. Additionally, the standout share gainer called out above all others was YouTube with rising engagement, strong dawn-funnel conversion and ongoing platform attribution improvements while also being insulated from Apple's recent 0S 14 update (ATT). Google Cloud still playing from behind. While on the one hand, GCP's #3 position in the cloud market would present the obvious case of room for improvement and a positive risk/reward, we believe the company needs to continue to broaden its product offerings relative to AWS and Azure in ‘order to allow for signing long-term deals which are less dilutive If itis to gain more meaningful share. Regulatory risk is higher than AMZN on a relative basis though still relatively low, in our view. In particular, we see more disruption potential with GCP and Google's care search engineering teams. AWS and Amazon's E-commerce group and while we don't believe regulators will ever be able ‘to fully curb Google's dominance in search, the widely-accepted 3P data ‘on Google perpetually favoring its own sites/products will likely continue to invite scrutiny, in our view. Establishing estimates. We forecast revenue growth to be 38/17/17% in "21-23 and EBITDA margins of 40/39/39% 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: GOOGL; USD 2,687.07 Price Target USD 3,400.00 Scenario Analysis* Donnside current Price Ups Ronnie ‘Pace | Tet | Soom 426% +7 Ta0K Key Statistics Sores O/S(MME S67. Maat Capi: 4.782548 iden 000 ld om Freorprie Vt (Mt 780.065, Jog Daly otume: 3203052 RBC Estimates Fy Dee 20202 20018 20 20236 Revenue 182,527. 251,193 4 292 985.0 337,607.7 EBITDA, Ad) 67,3120 100,485 3 113.2075 131.8929, Revenue a oa a a 2000 41,159.08 38,297.08 46,173.08 56,598.04 2021 55/314.08 61,8800 63,330 2 70,559.26 2022 165,856 2€ 71495 3E 73,3208 82312 76 EBITDA, Ad 2020 14,276.08 13,151.08 17,886.08 22,598.04 2001 22/335 04 26103, 24,916 3 26,506.0¢ 2022 26,080 6€ 28,243 6E 28,152 7E 30,730.56Copital Markets LS, Key fundamental questions How stable is Google's competitive positioning in core search/ advertising? Can YouTube sustain growth in excess of 30% for the next 3-5 years? How much regulatory risk exists across the enterprise? Can GCP gain meaningful share in cloud? What other adjacencies are most intriguing as potential upside drivers? September 30, 2021 ‘Alphabet Inc. ‘Our view Solid for now though there are two emerging trends in internet that are worth monitoring that could have implications with regards to Google's dominance at the top of the funnel: 1) pervasive funnel migration, and 2) user privacy. As an ‘example, AMZN developing its own advertising business combined with having an ‘ever-broader array of products suggests that it aspires to increasingly compete for Google's customers’ wallet. Separately, Apple recognizes that given the power the walled garden allows it in terms of things like browser preferencing, not only does it ‘essentially hold the keys to hundreds of millions of the most valuable consumers in the world for a company like Google, but itis also likely one of the few companies ‘that has the resources to theoretically build a new & viable alternative to Google search, We're not suggesting that any of these things upend Google's core business, ‘only that we're watching for early signals if things were to ever change. We think so. We believe the company is still so early on its monetization where ‘ad load could be meaningfully raised further, the positive conversion feedback we heard indicates that Google's already finding the same down-funnel intent that it does on core search, and finally we think the company has unique ability to unlock further value as it stitches together usage across platforms & devices in a way that other, video-centric advertisers can't Aside from the obvious and likely mandates around data privacy and politicians likely needing to spend some time to understand how the search algorithm exactly ‘works, we see regulatory risk here as relatively low, consistent with the rest of the group, albeit likely a bit higher than its peers. The principal reason for our thinking there is that we think if GCP is going to expand its product capabilities while also leveraging its Al & data analytics capabilities, much of this work and engineering ‘would come from Google's core business. When talking with Amazon, we were struck by how separate the AWS and Consumer business’ engineering team and technology already were, indicating that productivity oss would likely be minimal in ‘the event of some type of a presumptive break-up. ‘Technically, 6? is gaining share but when looking at the absolute dollar growth, 3 different story emerges. With AWS and Azure operating at $598 and $368 revenue run rates, respectively, GCPs high 40% growth vs. AWS and Azure in the 30% range illustrates the law of large numbers kicking in to some degree. We forecast AWS to ‘add over $158 of incremental revenue in 2021 vs. GCP at roughly $6.28. With that ‘aid, given we believe the company's engineering talent is arguably second to none con the advertising side, we have to think that product development investments are ‘occurring at GCP that would allow them to compete with AWS and Azure on amore level playing field in areas outside of core storage and compute. ‘To us, healthcare and transportation stand out. At a combined nearly $7 trilion of, ‘spend in the U.S. alone, there is no further justification needed to invest in such ‘an important opportunity in our view. On the health side, while litte is known, the ‘company has its own Google Health division looking at ways at leveraging Al to revolutionize largely administrative inefficiencies in global healthcare. Additionally, ‘through Other Bets like Verily and Calico, the company is addressing Life Science population health & aging challenges. For transportation, we think Waymo has an ‘opportunity to potentially be the operating system for the presumptive autonomous nel uhinepemsensmemes 3:Copital Markets LS, Key ESG questions ‘Alphabet Inc. riving applications of the future. We like the company's focus on software with OEM, tier-1 supplier and mobility network partnerships where each's core ‘competencies can be leveraged vs. OEMs trying to handle software development technology that goes beyond their domain expertise, This section is intended to highlight key ESG discussion points relevant to this company, as well as our views on the outlook, Both the questions we hightight and our responses will evolve over time asthe dialogue between management, analysts 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 Given the position of power Google's search dominance has created, we believe the ‘company's search algorithms have an unprecedented large platform and also duty, to responsibly enable, influence and sometimes, inhibit content which invariably tends to draw criticism from some dissenting portion of the population. The ‘company possesses as much personal user and online behavioral data as any ‘company on earth making security of the utmost importance. Given the size and ‘scope of the organization, both personnel as well as physical resource wise, the ‘company faces ongoing resource utilization challenges as well as the need to enact ‘and enforce critical diversity & inclusion initiatives. It does, Regarding environmental impact, the company has been carbon neutral ‘since 2007 and aims to be carbon-free by 2030. The company has an entire task force constantly evaluating how to reduce resource utilization across its physical and 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 amazon @ Google Near AVrlcd E-Commerce Vite ey ees if REL ey Pec) Core Platform| Prime ios Messenger/WhatsApp Google Account current/future investment targets (by vertical) Healthcare} v v v v Food| v Transportation} v a v Search/Ads| v “a v v Entertainment| v v ail ea Automotive| v v Travel| Cl Education| v v - v Apparel/Services| v - - Gaming| v ¥ r v ost 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 estimates 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 estimates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 a raised for virtually all consumer companies will be spent on digital advertising. = Legacy consumer companies spend <2% of revenue on Brick and Mortar Retail Advertising Spend as a % of Revenue (as advertising. ‘of FY2019 as we consider COVID nuances} ‘sis2 33% : = Sample of public internet companies’ spending ~12% on = one iuese digital ads $840 19% $43,638 — Net revenue marketplaces frequently spend 25-50% oo 4 cree $637 42% i683 : : suits 11% suio.zas = Relative to $14T consumer TAM in the U.S. — every 100 bps 7 Foot aaa of the gap is worth $140B of incremental digital spend tas pig eae — ~30% i i sie 468 524360, 30% incremental relative to 2021 host ro ay aes 1st siser 21% sreaiz aK ‘sis tis sony $180 40% uta saa 8 7.398 si 08 65% 5.008 80 35u 8 Weighted Average 500 Los sean 8 E-commerce Retail Advertising Spend as a % of Revenue (as of 140 a ® FY2019 as we consider COVID nuances, netbe a5 0% sm B Invested cna 204 52% $390 $100 Eoar si,ata 10% sa,en0 @ 20% 23 erst ‘is 20% sie rich S31 25% sa02 seo By = Funded PTOW 03 166% sas 15% ‘Company REAL sa 127% S38 $60 ‘Ad Spend se 88 33% sum & w s.086 120% som esi 10% i Waigited Average 09 a7 ‘h05r $20 oe 8 $0 0% 2016 = 2017,—S 201820192020 Source: Company filings, RBC Capital MarketsThe four determinants of success for digital advertising Intent — Why are your users really there? What are they trying to do? 1.AMZN 2.GOOGL 3. FB 4. PINS 5. SNAP First-party data quality — how much do you know about your user (deterministic or probabilistic)? 1.AMZN 2.FB 3. GOOGL 4, PINS 5. SNAP Demographic width — Are your users interested in all types of products or only some? 1.FB 2. GOOGL 3. AMZN 4, SNAP 5. PINS Audience size — limited size drives limited spend leading to limited equity value creation. 1.GOOGL 2.FB 3. AMZN 4, PINS 5. SNAPDigital advertising funnel positioning Funnel Top TikTok Demographics Narrow amazon — Bottom Source: RBC Capital MarketsE-commerce penetration going ever higher from 20% Global Retail Forecast 2019-2024E ($B. = COVID has created new level of customer expectation on timing, highlighting ever-present ae $95,000 25% % shipping elasticity. $30,000 oe ee pebzi = AMZN making critical investments in logistics and @ $20,000 5 J I ganna 822835 3 fulfillment, working towards same-day and on- i $15,000 591 308 $19,498 $20,191 $21,164 "ns wm 8 demand. 3 2000 j f j i i 3 3 $5,000 5% 60 e shan s5aze $500 $6308 = O% = Europe remains particularly underpenetrated. $0 2019 2020 20216 2022 © 2023E | 2024E — Prime: F1, Premier League, other live sports —==E-Commerce ===Offline E-Commerce Penetration Global Retail E-Commerce Forecast 2019-2024E (SB) US Retail ‘orecast 2019-2024E $7,000 $1,600 . $1,449 alae oT sa i ot 8 1,200 & 5,000 a i Mi $1,089- ® ev $1,000 $933 $400 6 : $800 8 $3,000 a $600 ,000 g Jo 1 8 $1,000 s200 8 30 30 2019 20202071 ©2022» «2023-20248 2019 2020-«-2021E—« 2022 —«2023E Source: eMarketer, Oberlo, RBC Capital Markets estimatesWhere's the outsized growth going to come from in e-commerce? US Retail E-commerce Penetration by Product Books, music 8 video (0 Computer & consumer electronics {042 4 hab __EEESR Renan eEEES EEE EES EEE TEPEEESEEEED Office: gegen Ee cel sous taceresusitea rena teva rensstevssessseresssssseroz=| ed Furniture & home furnishings III the: ES Health, personal care & beauty Auto & parts Food & beverage _ % me 20% 30% 40% 50% 60% 70% US Retail E-Commerce Sales by Product Category 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 ~$77B * MSFT: Azure has leveraged huge existing large enterprise rolodex ; ; )-2025E ($MM) ~ Product suite behind AMZN, but well ahead of Gaba Giond Forecast 2019-20256 (6M GOOGL $692,105 ~— We forecast '22E Azure revenue of ~$50B Bata a ar $583,526 = GOOGL: Google Cloud Platform (GCP) lacks $481,902 apes product depth but has deep analytics § somo “ ae — We like Google to win share where its solution 'g $200,000 $397,496" setis positioned well with G Suite and its deep $332,349 "Sed eecusity analytics, however we expect the company to $300,000 $270,033 =BPaas remain a distant third in the cloud oligopoly ‘e,98- Saas — We forecast '22E GCP revenue of ~$26B aoe 100,000 =Paas 0 2019 2020» 2021E-«2022E © 2023E°~—«-2024E°—2025E. Note: MSFT covered by RBC Capital Markets analyst Rishi J aluria Source: Gartner, Kinsta, RBC Capital Markets estimates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 ech acy DR Dey broken up: piers Consumer is likely Separate company Fane’ ties Oa |AMZN tries to play a, adversely impacted ‘would begin land & ah nthe role as a streaming Ielative to no breakup) expand all over again Hi consolidator Break-up model Break-up model AMZN continues py epapebemnnl Political risk prohibits land & allows land & chasing GOOGL and| pee econee expand FB's core end-market Cmneen Cycle would Would create an & partnerships, Unacceptable unprecedented alliances and outcome impediment to free affiliate relationships enterprise ‘would quickly materialize Would adversely impact private and books fevely Ga) pubiiccompany's | |companies mere not so broken up I Unacceptable outcome Source: RBC Capital MarketsCompany Initiation Overview Capital MarketsAlphabet Inc. (GOOGL $2,687.07, Outperform - $1.8T market cap) — PT: $3,400 Our view: ees = Google has earned its place as the gateway to the internet affording it Ticker: ever significant advantages and capital to invest in numerous large, important Market Cap ($B): $1,792,690 adjacent markets as it searches for incremental areas of future growth. EV ($8): $1,750,065 [Rating Outperform * While we think regulatory scrutiny is arguably higher vs. peers and sentiment is positive at the moment, we initiate at Outperform given: Revenue 20216 2022 2023, — 1) GOOGL's ability to perpetually custom-tailor its down-funnel strategy —_|street $251,024 $292,482 «$336,037 by vertical for maximum equity value creation; Rac $251,193 $292,985 $337,608 — 2) our bullish checks on core search's long-term pricing power alongside clear YouTube share gains. EBITDA 20216 20226 2023 ‘Street $100,561 $114,951 $131,551] e RBC $100,466 $113,208 $131,893] * Valuation is towards the higher-end of GOOGL's historical range. Initiate at Outperform; setting $3,400 PT based on 16.5x EV/'23E EBITDA. ascliel eaulinde ool pt 2023| EV/Sales 7.0x 6.0x 5.2x Key debates: lEV/eBmTDA 17.4« 15.5« 13.3x + 1) How stable is Google's competitive positioning in core search’ ‘Gon advertising? os + 2) Can YouTube sustain growth in excess of 30% for the next 3-5 years? 20 + 3) How much regulatory risk exists across the enterprise? $2,000 + 4) CanGCP gain meaningful share in cloud? $1,500 + 5) What other adjacencies are most intriguing as potential upside drivers? $1,000 $500 : HG Source: Company filings, Factset, RBC Capital Markets estimatesGOOGL historical EV/FY 2 EBITDA multipleInternet valuations 2-Year Revenue CAGR ('20-'22) 80% 70% 60% 50% 40% 30% 20% 10% 0x 2G 2.0x cvNA ° RDFN EXPE UBER ° Wet CARG ° AMZN ANGI 4.0% SKLZ Source: Factset, RBC Capital Markets estimates BKNG Goost . sasp 6.0x ABNB ° DASH FVRR ° . BMBL 1X . MTCH . . 8.0 10.0x 12.0x 14.0x 16.0x 18.0x EV/FY2 Sales Multiple 20.0xInternet Services comparative analysis Poesy COST TTY EVRevs ETT SE a ae 2 CR 20226 Alphabet inc.* GOOGL Outperform $2,687.07 $3,400.00 $1,750,065 ‘Amazon.com Inc.* AMZN Outperform 3,301.12 $4,150.00 $1,692,672 Alibaba Group Holdings BABA $147.58 $2,761,867 Aiton, Inet ABNB Outperform $168.07 $170.00 $113,832 Angilnc,* ANGI Sector Perform $12.28 $14.00 36.476 Booking Holdings inc." BKNG Sector Perform $2,377.82 $2,400.00 $101,637 Bumble Inc." BMBL_ Outperform $49.88 $65.00 $10,213 CarGunis* CARG Outperform $32.17 $40.00 $3,576 CanenaCo.t CVNA Outperform $305.81 $425.00 $56,908 DoorDash, Incs* DASH Outperform $205.83 $210.00 $15,768 Etsy ETSY z $205.30 $28,251 Expedia Group, inc." EXPE SectorPerfom $166.27 $165.00 $29,691 Facebook, Inc." FB Outperform §339.61 5425.00 $935,234 Fer Intemational LTD* FVRR Outperform $177.62. $200.00 $6,972 Match Group, inc.* MTCH Outperform $152.38 $190.00 548,654 Netfix ine NFLX : $599.06 $273,682 Pinterest inct_ PINS Sector Perform $50.37 $58.00. $34,693 Redin Corporation ROFN Outperform $50.14 $66.00 $6,492 Shopiy SHOP - $1,346.55 $167,467 ‘Shutterstock, Inc SSTK : siig31 $4027 ‘Skilz inc." SKLZ Sector Perform $9.97 $15.00 $3,860 Snapinc.t SNAP Outperform $71.76 $88.00 $124,816 Squarespace, Int SQSP_ SectorPerform $39.62 $48.00 36,140 TripAdhisor, Inc TRIP $34.08 $5,098 TrueCar, Inc. TRUE 7 $4.09 5150 Twitter, Ic. TWTR $60.07 $4949 Lyf inc.t LVF $53.32 $18,295 Uber, inc. UBER $44.52 $93,840 Yelp YELP = $37.98 32,734 Wixom LTD* Wik 5193.88 $11,733 Zillow Group, Inc." 2G $86.88 521,220 Median pa “Covered by Brad Erickson Source: RBC Capital Markets estimates for covered companies, Factset estimates for all others; Priced as of 9/29/2021 AMCG Seyecns “Sa “Sr ae ‘aan “Sia “Sam “St “se “eS ‘Sia “ase “haw “Sal Seve ie ‘a “et Se“ ‘oe Se" ca cones ‘noe ‘Bas “ae “eae ‘pa “hoe “fa Spe “noms “Bw baa ee er) cqunece San Ste Sh fee Sa) Sila St Gao aa Se “Ste Sin “aoe St “Ss mauve mt ae te sara my sam sl ise sae sae na suse sam sae sa remgietnnensahfis_yae nie pm aim sa se etm ‘au ace nana ssa Seon eH ae ‘sg am nena fame ane aa ie tome aG Mar un sep Dec Mar Jun sep Dec Mar Jun lémountsin ions excrptpershare dete) 1019 __209___—3Q19___aas 3q20__ 2020320 aco gari_2021 ‘eset Cash and cash equivalents $18,148 $16587 $16,032 $1B498) $15,644 $17,742 $20,128 $25.46) $26,622 $23,630, Marketable securities $94,340 $104,469 $105,145 $101,177) $97,585 $103,338 $112,467 $110,229| $108,482 $112,233 Accounts receivable, net $19,149 $20,965 $20,889 $25,326, $21,825 $24,201 $24,925 $30,930] $28,006 $31,967 Income taxes receivable sun $352 s182 $2,166, $1910 «$394 S588 S454 $493 sees Inventory $1,053 s3ca $1,401 3999) sso $s Saas 5728 $888 3307 Other currentassets___ $4,406 $4,100 $4,609 $44i2|___$5,165 $5,579 $5495__—$5,490|__— 7.646 $6,076 Total Current Assets $138,207 $147,437 $148,358 $152,578 $147,018 $149,069 $164,369 $174,296 $172,137 $175,697 Non-marketable Investments $14,474 $12,112 «$12,488 «$43,078, «$12,367 $12,961 $14,656 $20,703] $25.294 $25,532 Deferred income taxes $750 «$585 $564 sm $730 $895 $972 ages) $4129 $.153 PPE,net $60,528 $64891 $69,252 $73,645, $76,787 $78,748 $81,636 $84,709) $87,606 $91,697 Operating leaserightofuse $8,837 «$9,713 ««$10.341 SOM -«S11.219 «$14,557 S4tgae S221) $1298 12978 Intangible assets, net $2,063 «$1902 $1,747 su.g79) $4840 «$697 5.520 S14as) $ua23 4.626 Goodwill $17,943 $18,000 $18,068 $20,624) $20,734 $20,824 $20870 s2n,a75| $22,341 $22,406, Othernomcurrentassets___$2.547_$2,461_ $2,225 $2342) $2748 $2.731_$3.274__—$3,953| $4167 $4,298 Total Assets $245,309 $257,101 $263,044 $275,909 $273,403 $278,092 $299,203 $319,616 $327,095 $335,387 LUabilities and se Accounts Payable $3,710 «$3,925 «$4142 $5,561] $4099 $4,054 $4,301 $5,589) $4801 $4,708 Accruedcomp and benefits $5,072 $632 ««$7,309 $8,495) $5,656 $7,127 «$8,747 S086) $8,375 $10,088 ‘Accrued expenses and other current $19,382 $19,823 $21,038 $23,067, $22,601 $24,425 © $25631 —«$28.631| $30,732 $28,981 Accrued revenue share “$4,318 $4,567 $4,835 $5,916 $4,982 $5,005 $6,030 $7,500] $6,962 $7,438 Deferredrevenue and deposits $1,667 $4,717 -«51,679 $4,908) $1,938 $2,061 $2,302 «$253| $2,690 $2,715 Income taxes payable, net $751 $536 a3 $274) $913 $975___$1009 Seas Sa.g93_—S1.11 Total current liabilities $34,910 $37,000 $39,224 $45,201 $40,i89 $43,658 $48,200 56,834 _$55,453—G55,741 UT debt $4,056 $4074 $4082 $4554) $5,016 $4018 $13,902 $13,932) $13,887 $14,328 Deferred revenue, non-current $301 $387 $3ea $358, $350 $397 Sasa Saat $530, $510 Income taxes payable, non-current $11,605 $10,969 «$11,355 «$9,885 $9,207 $8,599 $g616 © $.gaa| 9278 Sa,6st Deferred income taxes $1,282 «$1882 $1,747 ©1701) $2079 $1,797 $1,973, «$3;561) $4,408 54,703 Operating lease abilities $8,205 $9,088 «$9,666 $10,214) $10,476 $10,709 $10,984 $14,346, $11,382 $11,619 Other Tlabiities $1417 _—$1a99__$1.637__ $2534) $2,427 $902 szaga__§2.269) $2346 2.270 otal Liabilities $63,877 $64,909 $68,075 $7467 $68,744 $71,170 $86,323 $97,072 $97,082 $97,822 ‘Stockholders’ Equity $183,472 _$192,192 $194,969 $201,442) _$203,659__ $207,322 $212,900__$222544)_§230.013 $237,565, Total Liabilities and SE $265,349 §257,101 $263,004 $275,809 $273,403 $278,492 $299,243 $319,616 $327,095 $335,387G Mae Jun sep Dee Mar un Sep ee Mar dun answsianion, ecpresrawe coe) 11921959 aS 1q0 220 scz0 aco sar 2a72 ‘Operating Actor Netincome $6657 $9947 $7068 Sug671 $6836 $5959 Suze $15,271 suzss0 $1855, Depreciation $2416 $2625 S732 $3,082 52899 $3.78 $3289 $3539) $2525 "$2,730, Amortization 587 $203, S48 «S81 $209 $208 Sia a6 $228 $215 StockBased Comp — $2.769 52,756 $2521 S265 s3or $3302 $395 $5,223 sss $3.03 Delerredincometares $73 $083 $239 $208 S175 Sst $136. 51570) S100 $379 (Galn}loss ondebt and equty secuies $1081 $2,797 «$1a79—$309) $802 -$1aa2 $2015 $3282 Says. $2883 lother,net 822, sm sn ar S17 $372 S25 S82 5255 $8 (Change in operating assets and bites gui Sites St S405 $2502 $80 $3,601 $5,485 S279 $3,601 Incomerares, net SL088 $1043 «S185 $5 338) “as Sas $69 S700 sas $082 ‘Other assets $265 sao S511 “ss Sta g233 37 $199 Accounts payable 5425, sia $87), sand $335 Stas Sa 5863 ss $130 ‘Accoued oxpenses and otheriblities 52294303 $4853 4.263 $3531 $4432 $2990 $4,613 $3530 $3731 Aectued revenue share $147 ‘87 S21 Shara “sort $179 $869 $1.362 siaa 8473 Deferredrevenve $51 $9__$59 86 37s ga 207 $137 $3 cosh from Operations $i2,000 iz 627 — $35 a6 $4027 pigs $13.993 917/003 $22,677 $19,250 $23,800 S4gs8 $5,125 $6732 -saos2 $6o0s $5391 $5408 $5,479) $5902 $5,496 Purchasosof marketablesec 20883 $23,841 $36.28 $19,347, 537568 $25548 $40821 $31,544 $3525 $2483, Maturities and sales ofmarketabesec $21,008 $19,685 $3408 $23,002 Sexeit $2463 $31877 $35,155 339208 $1419, Purchases of on-marketblesec $807 S188 S404 5433 “$n $ng | $553 “$5,311, $688 S765 Maturities and sales of non-marketablesee $89 $107.« $1108 S20 S213 Sis Ss S19 237 ‘Cashpaldfor business,net_ $09 $10 $125 $2,142 $90 Stes $43 $300 $iass $308 Other investing $34 $55 $379 siz su2_ sus $5357 $30 $23 (ash rom investing $5388 Sibass $5,905 $4703 SiseT Seas $15,187 37.281 “ses S078 Financing Atvitos petsharesettement of equtyanards $1375 $1,260 $s $4,100 giz $4478 gas? $1647) seas $2083 Repurchase ofcommon stock $3025 $3577 35.696 $6058 $8496 $6852 $7897 $7,904) 31133 $2736 Proceeds from issuance of debt, net ofcosts $315 32 30 30 S198 so 39863 so $900 $6,699 repaymentofdedt S35, sia Sus ga sua 356k 857 soa $771 >eeedsfrom the sale ofinteestinconsoldated enties $7 $1378 S18 $1500__$864 sz $338) s10_ $300 Cash from Financing 3418334705 0954 47,326 ~$6an6 57.488 S505 —-$9,270 Seo Sis a01 PKimpact $18 sib $28 om sk 5st sua $183 Nethangein Cash $2487 $2,561 $555 $2866, $4146 $1,902 $2,387 $6,336 157 $2982Capital Markets LS, ‘Target/Upside/Downside Scenarios Alphabet Inc. Valuation The stock trades at 13.6 EV/'23E EBITDA which is towards the higher end of its historical range (8x - 16x) and generally ahead of its most similarly situated, mega-cap peer group. Given the strong recovery in advertising post-COVID combined with especialy strong narratives around insulation, important advertising signal loss and YouTube share gains, we think the ‘ongoing premium here makes sense. To that end, we use 2 16.5x EV/'23E EBITDA multiple to derive our $3,400 price target, which justifies our Outperform rating, Upside scenario $4,000 based on 18x EV/upside to our'23 EBITDA estimates. Core advertising growth proves faster than expected into next year, the company's incremental commerce drives an inflection to GMV as well a tallwinds to core advertising and GCP shows accelerating growth with improving margin leverage. Downside scenario $2,000 based on 10x EV/downside to our ‘23 EBITDA estimates. Core search revenues slow meaningfully post- pandemic, incremental commerce traction progress slower than anticipated, GCP remains a distant #3 player both in ‘terms of market share and product offerings. September 30, 2021 ‘Alphabet Inc. Investment summary We like Google's ability to use its free cash flow generated from core search advertising to fund multiple other adjacencies for growth for many years to come. Due to its dominance at the top of the funnel, we think the company is in a unique position to accretively acquire data at the bottom of the funnel in order to maximize equity value creation while leveraging this capability across all existing and emerging customer access points. Longer-term, we are also intrigued with certain Other Bets addressing transportation and healthcare in particular given both their size as well a6 their relative importance to solving some of humanity's greatest challenges. Risks to rating and price target Intensifying competition most notably from Apple or Amazon where each party has unique sources of leverage which could change in the event the others became more competitive in each other's core market. App store payment and/or fee changes are mandated. Google's core search algorithm is regulated to statically drive content discovery that doesn't favor Google's properties. E-commerce growth stalls leading to slowing digital advertising spend. Any slowing to venture capital would likely disproportionately affect Google's core advertising business. A global macroeconomic downturn would cause companies to meaningfully slow advertising spend. Regulatory risk surround the potential breaking up of, the business and or sanctions issued on how the different parts of Alphabet's business could communicate and partner in terms of technology interconnectivty as well as crossover, personnel. (Grad Erickeon 1300) 400-0082; bnderidnen@ibconcom 42Copital ‘Alphabet tne. Markets LS, Company description Alphabet is the most trafficked website on earth as a top search destination providing the leading search marketing platform for advertisers and merchants. The company’s three reporting segments are divided up into Services, Cloud and Other Bets. Services Include Android, Chrome, Google Workspace products, Google Play (app store), Search and YouTube. In 2020, the company reported $188.5 billion in total revenue, $688 in total EBITDA and $42.88 in free cash flow. The company was founded in Menlo Park, CA in 1998 by Larry Page and Sergey Brin and ended 2021 with 144,056 worldwide employees. Required disclosures Conflicts disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access conflict of interest and other disclosures for the subject companies, clients should refer to https://www.roccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityid=1. ‘These disclosures are also available by sending a written request to RBC Capital Markets Research Publishing, P.O. Box SO, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario MSJ 2W7 or an email to rbcinsight@rbecm.com, ‘The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, @ portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets’ ratings of Outperform (0), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative bass. Distribution of ratings RBC Capital Markets, Equity Research {As of 304 un-2021 Investment Banking Serv/Past 12 Mos, Rating count Percent Count Percent ‘BUV (Outperform) SSCS OSSSCSC«SBSSSCSCS HOLD [Sector Perform] 375 40.69 3 30.09 SELL [Underperform] 32 361 4 7.84 Conflicts policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to ttps://www.rbecm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box SO, 200 Bay Stree, Royal Bank Plaza, 26th Floor, South Tower, Toronto, Ontario MSI 2W7. We reserve the right to amend or supplement this pliy at any time. With regard to the MAR investment recommendation requirements in relation to relevant securities, a member company of Royal Bank of Canada, together with its affiliates, may have a net long or short financial interest in excess of 0.5% of the total issued share capital ofthe entities mentioned in the investment recommendation Information relating to this i available upon request from your RBC investment advisor or institutional salesperson Dissemination of research and short-term trade ideas REC Capital Markets endeavors to make all reasonable efforts to provide research content simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets provides eligible clients with access to Equity Research Reports and to SPARC on the Firm’s proprietary INSIGHT website, via email and via third-party vendors. SPARC contains ‘market color and commentary regarding subject companies on which the Firm currently provides equity research coverage. September 30, 2021 ei ehmmarnrenenee mS: