| Description |
Within the science of finance, there is a quest to place a solid price tag on a given company this quest is known as valuation. Valuation models come in many forms, yet with all of them there seems to run a common thread of profitability. There are countless models that take the positive earnings of a specific company and translate them, with other parameters, into a feasible price per share output. However, with the exponential growth of technology, and especially the Internet, there seems to be a great number of companies that have quite expensive price tags, yet the companies are in a vast financial pit with only negative earnings to show since they went into operation. The problem that analysts now face is to find the valuation model(s) that project the correct value for these Internet companies that the market has launched into the billion dollar market cap range. The purpose of this thesis is to take six of the valuation methods that I have found throughout various publications and discuss their strengths and weaknesses. I also discuss various stages of Internet company valuation and touch on the fundamental industries that center their services or products around the Internet. I then take a closer look at the model that impressed me most, a valuation method used by Charles R. Wolf, a Senior Analyst from Warburg Dillon Read. The Wolf model derives a growth rate that the company must maintain for the current market capitalization to be valid, then they suggest whether it is likely or not that it will happen. This model does not offer a better pricing alternative. After understanding how the Wolf model works, I propose a solution that will offer a better pricing alternative. I take the geometric mean of a company's projected growth rates to justify what the future growth rate should be, then I plug that growth rate back into the model to calculate a more reasonable market capitalization. I also estimate a Weighted Average Cost of Capital and an operating margin. As revenues are reported quarterly, geometric means can be used, together with the Wolf model, to verify a fair market price of a given Internet retail company. |
