Pricing of Internet Companies: Financial and Non-financial Value Drivers

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In this paper we explore the importance of financial statements and non-financial value (volatility, media coverage and web metrics) drivers on the pricing of Internet companies, using the relative valuation method and, more specifically, price/sales ratio. Multiple regression analyses were run to determine which value drivers the data supported. Our results show that financial statements could not explain about two-thirds of variation in the price/sales ratio. Moreover, our results suggest that the market values of profitable and unprofitable Internet companies are inherently different. In addition, we find evidence to support payout ratio as a value driver for profitable Internet companies reflecting maturation in the Internet industry. At the same time, we also find evidence that Media Mentions is an explanatory factor in general for unprofitable Internet companies, and not only after an IPO. We also find sufficient evidence to support number of visits and recent revenue growth as important value drivers.
JEL classification: G320
Keywords: Pricing; Multiple; Regression; Value drivers; Website metrics.