Valuing Internet Companies. Selected Issues

The internet business is one of the most dynamically developing sectors of the global economy. Internet companies attract ever higher investment despite elevated risk, therefore developing valuation methods adapted to their specificity is of growing importance. This article is an attempt at providing theoretical grounds for potential approaches used in the valuation of such companies. Some of the major difficulties arise from the following reasons: 1) in the early stages of development, internet companies, like many other start-up companies, generate losses or symbolic profits; 2) internet companies grow at a very fast rate (hundreds or thousands of percent p.a.); 3) the future of internet companies is very uncertain.

The analysis of different valuation methods carried out in this article points to the conclusion that methods well grounded in theory, such as the Discounted Cash Flow and Real Options methods, have not lost any of their relevance in the "new economy". What is necessary however is to adopt a different approach to probability estimation and consider the internet companies' high flexibility in making business decisions when faced with dynamically changing market conditions. The article also addresses a crucial issue for the stock value of public internet companies - the investors' expectations and emotions.