Home Improvement, Web Style: Inside the Internet Valuation Tool Chest

Since 1994 the Internet and Wall Street have been struggling to find a way to value the great ideas and all-night caffeine binges that produced some of the world’s new services and brands ranging from Amazon.com to Yahoo!

Having been there from day one of this meeting of capital and connectivity, we found that yesterday’s financial analysis ratios fell short of providing insights into a new medium of commerce and content.

So in the past four years as we’ve pounded the metal Internet into something shiny and new along the way, we had to invent new ratios, new ways of looking at this industry.

Reason? Price-to-earnings didn’t work, market capitalization to sales was only one tool, debt was non-existent, cash flow was not developed, business models were constantly in flux, and the whole thing moved faster than a mob of World Cup fans making a dash for the hot dog stand. The Internet industry still does operate under much of the above.

So here’s a handy table of new and old ratios that are always in my toolbox ready to be pulled out and used together or solo to get a look at the phenom we are all part of. These aren’t the only tools, but enough to take note of for now. Welcome to ‘Web improvement.’ Sorry Tim Allen.

Steve Harmon’s Internet Valuation ToolBox

Market capitalization/users* A reference for comparables and peers, an indicator of overall
value per reach; see WEBDEX each week for this
Market cap/page views* Indicates how deep usage is
Market cap/ad views* Page views generating revenue rather than sitting blank
Private market value What private deals go for either in merger or in bidding
Enterprise value Subtract cash and add debt to market cap to determine core
value of the company; particularly useful in valuing potential takeover targets
Revenue multiple (or market cap/revenue) Primary method for valuing Internet stocks since most firms
are not earnings positive
Cash flow multiple The way mature media companies are valued such as Time Warner,
Disney or TCI. Usually EBITDA cash flow
Revenue per subscriber Primary way to value ISPs such as PSINet, Earthlink,
Mindspring or AOL
Lifetime value of an e-buyer* This is the metric we think will be key very soon in valuing
Internet companies, especially Amazon.com, CDnow, Egghead, ONSALE and etailers
Effective deal value What a deal went for after factoring cash and debt or other
considerations that affect the outcome of the offer
Market cap/POP* A ratio for comparing ISPs that have points of presence
Market cap or PMV to industry potential market share Helpful in determing future revenue, cash flow and earnings to
see if the firm is under or overvalued to its potential
Market cap/total Internet users* The value of a firm’s reach globally per user
Revenue/direct e-marketing Shows yield of campaign efficiency
Market cap/Websteader* Useful for valuing community of free home page providers such
as GeoCities, Angelfire or XOOM
Revenue/Websteader* Measures yield on community sites, how effective Websteads
generate revenue for community firms such as GeoCities, XOOM, Angelfire, Tripod (part of
Price/discounted earnings Project earnings and discount back to current stock price;
especially useful for firms with losses today; Netscape’s IPO was priced this way at 50x
projected EPS two years ahead
Sales/employee How lean and mean a company operates; 1 engineer and 10
lightbulbs or 10 engineers and 1 lightbulb?
Revenue/bandwidth* Useful to determine how effectively management deploys its bandwidth to generate sales

* = ratios we invented
during the past 4 years to analyze the Internet as an investment vehicle

(c) 1998 Mecklermedia. www.isdex.com

It’s here now! See Steve and other Internet investment folks talk stocks and venture capital at Summer Internet World, July 15, Chicago.

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