Valuation Model In Internet Stocks With Empirical Evidences

Internet has fundamentally changed people’s way of work, life, and entertainment over the recent15years. Accordingly, financing activities of Internet companies are becoming more and more frequent in capital market. The rise of Internet companies presents a question:how can these new types of business be valued properly? This thesis studies the valuation of publicly listed Internet companies, conducted an empirical research that provides evidence on how effective different valuation models can help on making investment decision.To address the question of valuing Internet companies, this thesis firstly reviews existing theories on valuation models and compare their advantages and disadvantages. Then, the thesis examines the current competitive landscape of Internet industry, discusses several features of Internet companies that is different from traditional ones, and goes over existing research and studies on valuation of Internet business.In the empirical study part, this thesis selects two types of valuation models, namely, Multiples and Discounted Free Cash Flow model. Specifically, the thesis examines the effectiveness of valuation with P/B ration, P/S ratio, PBG ratio and PSG ratio for Multiples and Free Cash Flow to Equity (FCFE) model for the DCF method.Based on the two methods mentioned above, the thesis examines publicly listed Internet companies on Nasdaq, using abnormal returns as a measure of performance to see to what extent the methods can help on investment decisions. Result shows that, contrary to theory, stocks with lower multiples fail to outperform those with higher multiples. Generally speaking, FCFE model does better than Multiples in the effectiveness of selecting stocks that are over-valued or undervalued.