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

Abstract

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.