From eye balls to Net Present Value what went wrong in the dot com valuation Is
Introduction During 1999 and the first half of 2000, the stock market infatuation with dot-com companies created enormous market capitalisations for these companies and in-turn, enormous wealth for their entrepreneurial owners. ... com). During the late spring and summer of 2000 however, some of the "irrational exuberance" regarding publicly traded dot-coms decreased with share-prices correspondingly going down. Stock market pricing multiples significantly decreased for practically all dot-com ventures, many of which went bankrupt or were acquired by other companies. In the course of this re-pricing of dot-com stocks, investors appeared to be returning to more traditional valuation metrics. In the August 15, 2000, issue of Bottom Line, money manager Richard Bregman wrote: "Most investors have finally recognised that the dot.com companies that were yesterdays darlings were wildly overpriced. I believe unprofitable dot.com companies, or those with poor business models, are not going to recover." While sceptics of the new economy support the view that Internet stock prices are still high in comparison to possible future profits, new economy optimists argue ”that in this new world of rapid technological change, old methods of share valuation have become irrelevant.” ‘Eyeballs’ as criteria for dot.com stock prices valuation During the height of the dot.com boom the “common wisdom”, as represented in the business press and by Wall Street analysts alike, was that, with the exception of revenues, traditional financial statement information was not relevant for the valuation of Internet companies’ stock prices. Eyeballs, as web traffic measures are popularly referred to, together with strategic alliances were more value-relevant for the share prices of Internet stocks. Web traffic measures had in fact become standard Internet company performance benchmarks that are still now commonly reported in the business press, voluntarily disclosed by companies at the time of their earnings announcements, and frequently mentioned as valuation parameters in analysts’ reports. During this period, it was being expected that current traffic at a dot.com’s web site would be positively related to future revenues, as it reflected potential future demand for the company’s products and, at least indirectly, affected the rates the firm could charge for advertising on its web site. This data comes directly from the Internet companies, as well as from independent rating firms (such as Media Metrix, PC Data, and Nielsen//Netratings), and includes, among other numbers, statistics on web site page views and visitors. Another controversial discussion of whether prices of Internet stocks were and indeed still are justified or not raises the question of specific characteristics of Internet companies which lead to this uncertainty about the “true” value of such firms. ... For many information technologies, consumers benefit from using a popular format or system. The value of a product to one user thus increases as the number of other users increases and the product becomes a standard. ... In markets with network effects a common principle is turned upside down: an increasing dissemination of a product does not result in a reduction of the value of this product but in an increase of the product value. ... However this recognition of network effects does not mean that every Internet Company can profit from these effects.