The eyeballs have it: Searching for the value in internet stocks

In this paper we provide insights into the manner in which (relatively sparse) accounting information, along with measures of Internet usage, is employed by the market in the valuation of Internet firms. We do not find a significant association between bottom-line net income and our sample firms' market prices, consistent with the claim made by some investors that financial statement information is of very limited use in the valuation of Internet stocks. However, when we decompose net income into its components, we find that gross profits are positively and significantly associated with prices. In addition, we find that in most instances both unique visitors and pageviews, as measures of Internet usage, provide incremental explanatory power for stock prices, over and above net income and its components. We also separately analyze the e-tailers and the portal and content/community firms in our sample and find significant valuation differences with respect to both their financial data and the measures of Internet usage.