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
(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.