Back to Basics: Forecasting the Revenues of Internet Firms

Abstract

In light of the importance of revenues in the valuation of internet stocks, this paper examines the roles played by analysts, past revenues, and web usage data (unique visitors, pageviews, and minutes spent at a firm's web sites) in the forecasting of future revenues. In contrast to evidence from other industries, we find that analysts' revenue forecasts almost always underestimate the revenues of internet firms. Historical revenue growth is shown to have incremental predictive power over analysts' forecasts, more so for our sample of portal and content/community firms than for our e-tailer sample. Estimates of web usage growth, on the other hand, generally have significant incremental value for predicting the revenues of the e-tailers, but little predictive power for the revenues of the p/c firms. Finally, we examine whether measures of web traffic have incremental value in the prediction of revenues above time-series forecasts. This issue is especially important when valuing firms with little or no analyst coverage, where there is, of necessity, an increased reliance on historical revenues for forecasting purposes. We find that all three web usage metrics do have significant incremental predictive power.

JEL Classification: G10, M41, G12, G29