The Value Drivers of Internet Stocks: A Business Models Approach

Abstract

This paper contributes to the literature on non-financial stock valuations, focusing on the internet, in three ways. First, it highlights the importance of distinguishing the business models employed by internet firms in the determination of their value-drivers. While prior literature has found earnings to be unpriced (or even negatively priced) for internet firms in general, ISP/infrastructure and portal-based firms are shown here to have positive and significantly priced earnings. Second, it develops a simple conceptual framework which is used to create a more comprehensive set of non-financial value drivers and empirically tests a number of these (e.g., the percentage of the internet audience reached and the number of pageviews and the addition of previously unexamined data on the number of advertisements shown to those audience members and their responses to them). Finally, it constructs a larger sample of firms over a longer time horizon than examined previously. This enables a more detailed examination of changes in the pricing of financial and non-financial variables during both the recent boom (through February 2000) and bust (since) periods in the market for internet stocks. Results indicate that, since the crash, earnings for the full sample and most of the individual business models are positively priced. Furthermore, reach and other activity measures continue to have explanatory power despite the increasing value-relevance of earnings.