MBA Thesis – What drives Internet company valuation?

After many months of hard work I have submitted my thesis and can now reflect on the work I have done. My thesis titled What drives Internet company valuation? A business model approach to Internet value drivers was a combination of my passions of business strategy, business models and Internet companies.

I will be publishing key parts of the thesis in an upcoming blog post series.

1. Building a new Internet business model classification framework
2. Value drivers for Internet business models
3. Internet value driver maturity model
4. Recommendations to maximise Internet company value

Abstract

With modest financials Facebook’s IPO market value was greater than industry stalwarts Yahoo, eBay and Dell. Why do some Internet companies have seemingly high market valuations relative to their financial performance?

This research aims to determine what drives market valuations for Internet companies and to discover whether value drivers vary across the different types of business models.

Given the ubiquity of the Internet and the huge growth in online businesses one would assume a large body of research on Internet value drivers. However the literature review found that this is the first study of business model value drivers since 2001 and reinforces the value of this research.

The objectives of the research were threefold:

1. To identify the value drivers for Internet companies.
2. To create a collectively exhaustive categorisation of Internet business models.
3. To determine whether different business models have varying value drivers.

Existing Internet business model classifications were identified from the literature. The most promising classifications were extended to create a new classification of seven Internet business models: Community, Content, Ecommerce, Infrastructure, Marketplace, Service Provider, and Software.

Accepted best practice is to use financial metrics to value companies. However for Internet companies it is also important to include non-financial website traffic variables.

The literature review identified six value drivers for market value divided into two categories:

1. Non-financial traffic metrics (reach, pageviews, traffic rank)
2. Financial metrics (revenue, EPS, Price-to-Sales).

Data were collected on the 71 firms in the Nasdaq QNET Internet index and were analysed via descriptive statistics and regression models to determine value drivers.

The aggregated results found revenue is the dominant driver of Internet market value; having the highest correlation with market value and the highest R2 (0.93).

However when the sample was disaggregated into business model categories the results showed that each category had unique value drivers, which were a combination of financial and non-financial drivers.

The data also highlighted that Internet markets seem to go through different phases with traffic drivers playing a disproportionate role in the early stages followed by the progressive importance of financial drivers as the market matures.

The key recommendation is that management should focus on building revenue, not cutting costs, if they want to maximise market value. In addition, management should be aware that each business model has unique drivers and these should be identified, tracked, measured closely.

Keywords: business models, Internet, value drivers, business model classification.

Contents

Download the full document: What drives Internet company valuation? A business model approach to Internet value drivers.

The report covers:

• Introduction
• Literature Review
• Research Methodology
• Data Analysis
• Data Discussion and Interpretation
• Conclusions
• Recommendations
• References
• Appendices