Valuation methods of Internet stocks

Diplomarbeit von Gunnar Anger

Abstract:

The purpose of this thesis is to discuss some important reasons for the recent boom of Internet stocks, and to show and assess different methods to evaluate them.

The Internet is a medium which is yet in the early days of its development and which will revolutionize communication habits, trade and leisure time behavior in an unseen manner. I will show this in the chapters 2 and 3 with psychological reasons for the recent boom.

After that I present 3 typical Internet companies (Yahoo!, eBay, and Amazon.com) with their business content, financial data, and future outlook.

Afterwards, the analyzing part of this thesis starts, and I demonstrate which figures an investor should look at in order to have a broad overview about the investment.

In chapter 5 I present some financial figures from both the income statement as well as the balance sheet, in chapter 6 I give a survey of ratios which are used from analysts and make some comments about how practical they are.

Subsequently, chapter 7 deals with more traditional valuation methods, used by institutions like the Federal Bank of America. These are general methods in order to show whether markets are over-/ undervalued or not.

After that, I present the valuation models used by investment banks: Economic Value Added (EVA, chapter 9), Discounted Cash Flow (DCF, chapter 10), Real options theory (chapter 11), and multiples (chapter 12).

In the last part I summarize the outcome and give an outlook how Stock orders are based on expectations only.

Table of contents:

1.	Introduction	1
2.	Day traders	6
3.	Principle of floating	12
4.	Presentation of 3 typical Internet companies: Yahoo!, eBay, and Amazon.com	15
4.1	Yahoo!	16
4.1.1	Business description	16
4.1.2	Financial data	20
4.1.3	The outlook	24
4.2	eBay	26
4.2.1	Business description	26
4.2.2	Financial data	27
4.2.3	The outlook	29
4.3	Amazon.com	31
4.3.1	Business description	31
4.3.2	Financial data	34
4.3.3	The outlook	36
4.4	Comparison eBay versus Amazon.com	41
5.	Financial figures to look at
5.1	Income statement analysis	45
5.1.1	Sales	45
5.1.2	Gross margin	46
5.1.3	Operating expenses	46
5.2	Balance sheet analysis	47
5.2.1	Inventories	47
5.2.2	Cash position	47
5.2.3	Quality of the management	48
5.2.4	The competitive landscape	50
5.2.5	Market position	50
6.	Ratios	51
6.1	Return an marketing	52
6.2	Price earnings to growth	52
6.3	Price/earnings (P/E) ratios as a traditional method	56
6.4	Price/sales ratio	57
6.5	Debt/capital ratio	58
6.6	Earnings per share	60
7.	Valuation methods in theory	61
7.1	Fed Model	62
7.2	Campbell-Shiller-Model	64
7.3	Cornell-Model	64
7.4	Glassman-Hassett-Model	64
7.5	Traditional dividend discount model	66
8.	Valuation methods used by investment banks: Overview	68
9.	EVA-method: Economic Value Added	69
9.1	Introduction	68
9.2	Elements of EVA	69
9.2.1	NOPAT-Net Operating Profit After Taxes	71
9.2.2	Calculation of capital	73
9.2.3	Calculation of costs of capital	74
9.2.4	Required conversions	75
9.2.4.1	Leasing expenditures	75
9.2.4.2	Research and Development	76
9.2.4.3	Valuation of LIFO-principle	76
9.3	Market Value Added	77
9.4	Calculation example: Amazon.com	78
9.5	Calculation example: Yahoo!	81
9.6	Opinion	84
10.	Discounted Cash Flow	88
10.1	Definition	88
10.2	Different approaches of DCF	91
10.3	Calculation example: Gigabell	92
10.4	Calculation example: Amazon.com	96
10.5	Conclusion	98
11.	Real options theory	103
11.1	Introduction	103
11.2	Operative and strategic real options	107
11.3	Calculation examples	108
11.3.1	Operative real options	108
11.3.2	Strategic real options	109
11.4	Disadvantages of this model	112
11.5	Real options against Discounted cash flow	113
12.	Multiples	115
12.1	Stock And Debt Approach	115
12.2	Direct Income Approach	117
12.2.1	Similar Public Company Approach	117
12.2.2	Further approaches	121
12.3	Calculation example: Gigabell	121
12.4	Calculation example: Amazon.com	123
12.5	Opinion	124
13.	A different point of view by Mr. Blodget	127
14.	General outlook and conclusion	130