Equity valuation using accounting numbers on internet and IT service firms

Abstract

The development of the new economy and establishment of Internet-based companies created an industry of fast growing corporations with much interest to investors. The valuation of these firms has drifted away from estimates provided by traditional valuation models, which tend to undervalue Internet stocks consistently. Additionally, financial information has shown to be of little use when assessing the value of dot.com stocks (Trueman et al., 2001) The objective of this paper is to shed some light on the usefulness of accounting-based valuation models when valuing Internet stocks. It attempts to provide users with a guide to the relative performance of models when valuing Internet companies and demonstrate how the assessment of these companies is compared to the valuation of firms in other industries. Empirical results show that Internet and IT Service companies are harder to value, compared to other firms, using traditional valuation methods. The valuation model that provides the best estimates for these enterprises is the forward P/E calculated using a harmonic mean when compared to the RIVM and AEGM. Results also show that analysts prefer stock-based valuation models to flow-based models.

Date of Award	16 Feb 2017
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Correia Guedes (Supervisor)