Valuation and Value Creation in Internet-related Companies

Abstract:     
This paper will analyze the evolution of a number of companies (Terra, Amazon, America Online, Microsoft, B2B companies, online brokers, . . .), although our focus will be the valuation of Amazon. We compare Damodaran's valuation by cash flow discounting ($35/share), Copeland's valuation by scenarios and cash flow discounting ($66/share) and our valuation by simulation and cash flow discounting: $21/share

We claim that in a company such as Amazon, it is necessary to introduce uncertainties in the expectations. We deal with uncertainty (volatility) in the hypotheses doing simulations. In our valuation, the likelihood of bankruptcy or voluntary reorganization is 43.43%.

It is very interesting to compare and try to differentiate what Internet may signify in the first years of the 21st century with the revolutionary effect on society that the railways, freeways, airlines, radio, television and the telephone had when they first appeared. We also urge the reader to analyze the history of companies such as Levitz, Home Shopping Network, MCI, LTCM and Boston Chicken.

Internet is no King Midas. Business ideas related with Internet must be analyzed with the same rigor as any other business initiative. On the other hand, it is fairly obvious that Internet will reduce (it is already reducing them) the margins of banks as a whole. Some banks may succeed in benefiting partially from Internet if it manages to increase its customers by taking them from other banks. However, for the industry as a whole, Internet will bring about a decrease in their margins that will not be matched by a parallel decrease in their costs.

A website is not necessarily a business. Selling below cost gets you lots of customers, but not much money.

Keywords: Internet; Valuation; Value creation

JEL Classifications: G12, G31, M21

Working Paper Series