The Role of Economic Fundamentals, Web Traffic, and Supply and Demand in the Pricing of U.S. Internet Stocks

Abstract

In this paper I measure the importance of three groups of factors in the pricing of U.S. Internet stocks: economic fundamentals, web traffic, and supply and demand forces. Using log-linear regression on a panel of data for Net and non-Net stocks on 2/1/2000, I highlight five findings. First, contrary to popular perception, neither web traffic or supply and demand forces drive Net stock prices. Rather, economic fundamentals in the form of current book equity, forecasted one-year ahead earnings and forecasted long-run earnings growth dominate in explaining cross-sectional variation in Net stock prices. Second, incremental to economic fundamentals, Net firms' equity market values are reliably related to only one measure of web traffic-the number of unique visitors to the firm's web site. Net firms' equity market values are unrelated to the number of page views, hours spent at the website, the average age and the average income of visitors. Third, over and above economic fundamentals and web traffic, Net firms' equity market values are reliably correlated with proxies for supply and demand forces in the form of public float, short interest and institutional ownership. Fourth, the value-relevance of supply and demand factors only exists for Net firms with no business-to-consumer web traffic, suggesting that the public familiarity that business-to-consumer e-commerce creates leads to greater capital market efficiency in the pricing of their stock. Finally, the equity values of non-Net stocks are unrelated to supply and demand forces, yet are strongly associated with economic fundamentals. Overall, I conclude that while the pricing of U.S. Net stocks is dominated by expectations of near- and long-term profitability, they are also uniquely impacted by non-traditional value-drivers in ways that non-Net firms are not.