The Internet is probably the most sweeping and potentially powerful medium. There's no question that enormous growth is there, but how much should investors pay for that potential? What's their real value? Unfortunately it's not easy to develop a valuation model that exactly explains Internet stock's unreasonably high prices in spite of poor financial performance.
So many people argued that financial information and traditional valuation method is meaningless in the 'New economy'.
In this paper I analyze role of basic accounting data and web traffic as one of the important value drivers for Internet firms.
I also analyze pure Internet firms by Internet business models. I classify Internet firms into Content&Community, E-tailer and Search&Portal.
Sample Internet firms come from InternetSockList (compiled by internet. com Corporation). And the financial statements information is taken directly from annual reports filed to SEC in March 2000. Web traffic information is obtained from PC Data, Internet survey firm. Final sample consists of 80 pure Internet firms.
Using correlation analysis and log-linear regression, I found following results and implications bases on that results.
First, Contraty to conventional wisdom, basic accounting data are value relevant to the Internet firms. So accounting is still a good value relevant system.
Second, Internet firms have distinctions from traditional firms because income variables are not value relevant and large marketing costs are positively value relevant. It means marketing costs are not period expenses but investment to intangible assets. So it could be an important factor for Internet firm's financial statements analysis.
Third. Web traffic (unique visitors, Reach%) has explanatory power for Internet firm value. But for Content&Community firms, the web traffic is not value relevant. It means business earning model is more important than mere web traffic increasing especially for Content&Community. And it also tells limitation of web traffic information.
Fourth. There are big differences in explanatory power of the valuation model (adjusted $R^2$) between E-tailer (0.813) and Content&Community (0.551). And significant explanatory variables are also different between business models. Book value and web traffic (Reach%) are significant explanatory variables to E-tailer and book value and sales are significant variables to Content&Community. These differences also imply that business model classification is important factor for Internet firm valuation.
