The effects of business models and market conditions on internet valuation : an empirical investigation of the US market

Abstract

As the Internet develops into a robust channel for commerce and communications, the importance of Internet valuations is increasing. Although Internet valuations are very important, valuing high-growth, high-uncertainty, high-loss Internet firms has been a challenge. Generally, a robust valuation consists of an in-depth analysis of a specific company and its market conditions. However, most existing studies of Internet valuations limited to the shorthand approaches, not considering a set of complex internal and external factors that affect a Internet firm and its industry. In that regard, the purpose of this study is to provide a systematic guideline for valuing Internet companies in terms of economic theory. This study especially focused on the differences in Internet firms`` business models and the market conditions at the strategic group level and on how these differences affect a firm``s value. Moreover, this study analyzed the relationship between the evolution patterns of the Internet market and valuation methods by using the business life cycle theory. First, this study divided 250 Internet companies in the US into nine strategic groups, concentrating on their business models, and analyzed whether there are differences in performance and business life cycle patterns across strategic groups. And it examined how these differences may affect valuation methods. The hypotheses were tested using mean test, ANOVA test, correlation analysis and the analysis of stock price chart. The main points of the result are: (i) there were differences in performance among strategic groups in the Internet industry, (ii) each strategic group had a different business life cycle in terms of stock price flow, (ii) the differences of the strategic groups and life cycle patterns affected valuation methods. Especially, the correlation coefficients between market capitalization and traditional valuation variables such as revenue were very high in case of the firms o...