The Valuation of Internet Companies : A Study of Current Market Capitalization

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Song, Steve
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The author analyzes the valuation of Internet companies, assuming the four companies analyzed can be related to the industry as a whole. The methods used in valuing the Internet companies include the following: Tobin's q theory, economic value-added analysis, discounted cash flow analysis for fair market value, and price to cash flow multiples. The companies used in this report are Cisco Systems, Sun Microsystems, Microsoft, and Adobe Systems. The reasoning for choosing the above methods of valuation is to utilize a broad mix of techniques in analyzing the above companies. Because traditional fundamental analysis, such as dividend reinvestment and earnings per share can no longer be used to value common stock, different techniques must be used. The former claim is the result of zero dividends and negative earnings for the majority of Internet companies. Furthermore, the techniques utilized attempts to include methods ranging from traditional (Tobin) to innovative (EVA), in order to determine whether or not some contrast exists between the different measures. In choosing the companies, regular, positive earnings are imperative for sound analysis. Otherwise, speculation plays a larger role, and fundamentals play a smaller role, because positive prices are generally not a justification for bottom-line losses. Each respective method of valuation suggests varying market values for these companies. Specifically, EVA returns the lowest intrinsic values, discounted cash flows return the second lowest, and price to incremental cash flows return the highest fair market value for the stocks. Without exception, the above companies' actual market values fall within the derived price level of at least one of the valuation measures, but tend to fall within the latter two methods which are more speculative than the EVA method. The conclusion drawn from this is that based on the fundamentals, Internet companies, even the large, dependable blue chips, are overvalued. However, the justification for current prices can and will be made for any company with positive earnings streams and significant technologies.
79 p.
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