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Rational Pricing of Internet Companies Revisited

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  • Schwartz, Eduardo S
  • Moon, Mark
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    Abstract

    In this article we expand and improve the Internet company valuation model of Schwartz and Moon (2000) in numerous ways. By using techniques from real options theory and modern capital budgeting, the earlier paper demonstrated that uncertainty about key variables plays a major role in the valuation of high growth Internet companies. Presently, we make the model more realistic by providing for stochastic costs and future financing, and also by including capital expenditures and depreciation in the analysis. Perhaps more importantly, we offer insights into the practical implementation of the model. An important challenge to implementing the original model was estimating the various parameters of the model. Here, we improve the procedure by setting the speed of adjustment parameters equal to one another, by tying the implied half-life of the revenue growth process to analyst forecasts, and by inferring the risk-adjustment parameter from the observed beta of the company's stock price. We illustrate these extensions in a valuation of the company eBay. Copyright 2001 by MIT Press.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal The Financial Review.

    Volume (Year): 36 (2001)
    Issue (Month): 4 (November)
    Pages: 7-25

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    Handle: RePEc:bla:finrev:v:36:y:2001:i:4:p:7-25

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Sascha Mölls & Karl-Heinz Schild, 2012. "Decision-making in sequential projects: expected time-to-build and probability of failure," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 1-25, July.
    2. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.
    3. Soenke Sievers & Jan Klobucnik, 2011. "Valuing high technology growth firms," Cologne Graduate School Working Paper Series 02-07, Cologne Graduate School in Management, Economics and Social Sciences.
    4. Bernardo, Antonio E. & Chowdhry, Bhagwan, 2002. "Resources, real options, and corporate strategy," Journal of Financial Economics, Elsevier, vol. 63(2), pages 211-234, February.
    5. Alesii, Giuseppe, 2005. "VaR in real options analysis," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 189-208.
    6. Schwartz, Eduardo S., 2002. "Patents and R& D as Real Options," University of California at Los Angeles, Anderson Graduate School of Management qt86b1n43k, Anderson Graduate School of Management, UCLA.
    7. Cassimon, D. & De Backer, M. & Engelen, P.J. & Van Wouwe, M. & Yordanov, V., 2011. "Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity," Research Policy, Elsevier, vol. 40(9), pages 1200-1216.
    8. Christophe Boucher, 2003. "La valorisation des sociétés de la Nouvelle économie par les options réelles : vertiges et controverses d’une analogie," Revue d'Économie Financière, Programme National Persée, vol. 72(3), pages 299-315.
    9. Bernardo, Antonio & Chowdhry, Bhagwan, 1998. "Resources, real options, and corporate strategy," University of California at Los Angeles, Anderson Graduate School of Management qt2m96n2gw, Anderson Graduate School of Management, UCLA.

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