The non-financial measures presented in this report, reach, stickiness, and customer loyalty, are web metrics that are most frequently used in the business press and prior studies (Demers
& Lev, 2001). There are several reasons to expect usage levels at an Internet firm’s web sites to be positively related to its revenues. First, higher web usage likely reflects greater online demand for the firm’s products and services. Second, increased web traffic leads to greater revenue bookings from existing advertisers. Third and finally, higher web usage attracts more advertisers, and indirectly allows the firm to raise the rates charged for future advertising.
8.1. The Value-Relevance of Non-Financial Information
The problem with “non-financial” measures is that they do not indicate any details of the future cash flow, which is fundamental of a firm’s value. The three dimensions of web traffic performance presented earlier, reach, stickiness, and customer loyalty are all important measures, but they do not give clear picture of the revenues.
Demers & Lev (2001) suggest that the reach and stickiness performance measures are value-relevant to the share prices of Internet companies, while loyalty is not a significant value measure. The result of Demers & Lev’s (2001) study also shows that the web traffic metrics have significant value-relevance both before and after the Internet shakeout of year 2000. They further claims that their findings have significance as value-relevant, contradicted the claims of some analysts that web traffic measures are no longer important (Demers & Lev, 2001).
8.1.1. Specialist Discussion
To get a contemporary and accurate commentary of the issue on the value-relevance of non-financial measures I interviewed two specialists, an Accountant and a Corporate Finance Analyst of a global accounting and advisory firm in Sweden. Their comments concerning the value-relevance of non-financial measures contradicts the results of Demer et al’s (2001) study. The specialists claim that it is not the non-financial measures in particular that have value-relevance, but it is the operations behind the data, the opportunities to generate profit that have value-relevance. For them, raw non-financial data does not mean anything, unless it is based upon a profound business plan. With the specialists’ comments in mind, which must serve as real practice of the industry, it is interesting to analyze prior research that advocate the value-relevance of non-financial data. Demers & Lev’s (2001) study presents evidence for the value-relevance of the non-financial information, but obviously there is still discordance of the use of definitions in the area of valuation of Internet firms. For practitioners, a profound
business plan is the most important tool when valuing a business (Interview, 2006). This is also on par with the statement of investors in 2006, who claims that funding is harder to get comparing to the late 1990ies, and that Internet entrepreneurs of today have to have proper and thorough business plans and revenue models presented (Cooke, 2006)
The non-financial data like reach, has of course no value-relevance if no one are making business out of the potential numbers. But if someone is doing business, by attracting many unique visitors, the measure reach suddenly is crucial data. In this context it must be obvious that the non-financial measures are related to business. The specialists do not want to phrase it that way though, but are emphasizing that the data of reach must be translated into potential sales of an audience (if e-commerce) or exclusive exposures for advertising (ad sales). It is obvious that this view of valuing firms, no matter industry, is traditional. The aversion to non-financial data stems from the volatility of the measures and uncertainty. That is to say, the numbers are not equivalent from business to business. It is therefore difficult to get an equitable comparison between different businesses and firms. Prior studies are showing on value-relevance of non-financial measures, but there is obviously difficulties in using and interpret the numbers. In valuation of firms the non-financial data must be used with care (Interview, 2006).
The discussion and interview with the specialists is on par with common opinions recognized in financial papers and specialist magazines during year 2006. The articles concerning
Internet valuation has during year 2006 dealt with the relevance of non-financial measures and the justification of the astonishing high prices of the Internet firms sold in year 2006 (FT, 2006. & Cooke, 2006.). It is interesting to analyze this behavior, since academic studies has shown on relevant significance of the non-financial measures. This behavior is similar to the investors’ irrational behavior of the late 1990ies. The difference from then is of course a more mature industry, but that would also affect the investments with more certain valuation
models.
8.1.2. Valuing with Market Expectations and Comparables
Damodaran (2001) gives examples of how the seeking of new methods to value uncertain industries like new technology, were made by some analysts in the late 1990ies. One of the measurements was to divide the market capitalization15 with the numbers of unique visitors of
15 Market Capitalization, Definition: MCAP. Market capitalization represents the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their
a website (reach16) in order to get the single unique visitor value at a website. By using this measurement the analysts could compare the unique visitor value of one investment to another and make assumptions in the basis of this data and use to new investments.
Damodaran (2001) points out the misjudgments on this assumptions made prior to the Internet shakeout in year 2000 and claims that the methods have no or minor significance.
The market capitalization represents, by definition the aggregate value of a company or a stock, that is the markets expectations of how profitable the firm’s operations will event17. The forecasts and market expectations made prior to the Internet shakeout contained several errors. Valuing techniques that are based on data from uncertain sources cannot be stated as significant measures. Prior to year 2000 there existed no comparables in the new technology industry, which can explain one of the main reasons for many analysts’ misjudgments. The measure of unique visitor value had a high degree of incorrectness since it was based on the comparables stocks, that is, the comparables market expectations, which without doubt were overvalued (Damodaran, 2001).
current price per share (www.investorwords.com, 2006)
16 The numbers of unique visitors corresponds to E. Demers, & B. Lev. (2001) dimension reach of web traffic measures (Chapter 3).
17 Stock prices contains several multiples of the status of a company, but depends chiefly on the market expectations of how the future of a firm will event.