Valuing Internet Stock and Intangible Assets

This chapter discusses the valuation of internet stocks, emphasizing their divergence from traditional bricks-and-mortar economies. Firstly, I will explore the unique features of internet firms and how conventional accounting conservatism underestimates their fair value when employing traditional valuation methods. Biases in rules and practices obscure the assessment of business development and operational performance, leading to an underestimation of the long-term value of these businesses. To address this issue, three specialized stock valuation methods are proposed to minimize the biased earnings effects on business valuation. The first method is the adjusted P/E method, which aims to neutralize the impact of accounting conservatism prior to calculating the price-to-earnings ratio. The second method involves replacing the earnings multiple with the margin-adjusted sales multiple, taking into account biases. Lastly, the customer-based valuation method utilizes a distinct set of parameters derived from customer data. In addition, development of these new stock will incur inexorable high-uncertainty. It may require specific focus on business uncertainty. In so doing, I have incorporated the probability of different scenarios and evaluates their impact on the long-term market value of the business. All four methods are illustrated with examples. Digital businesses primarily rely on intangible assets, which however may not be adequately disclosed in the balance sheet. This chapter further evaluates these crucial intangible assets. I will discuss this emerging phenomenon and highlight the significance of undisclosed intangible assets for businesses. I have selected two important intangible assets—technology and brand value, and will demonstrate how their valuations can be assessed through case discussions.