(April 11) – “For investors, surviving through the recent roller-coaster ride in Internet stocks has caused some serious motion sickness. While most Internet darlings struggle in search of profitability, investors struggle to justify the enormous market capitalizations that accompany them,” writes Nick Bontis in today’s Globe and Mail.
“Because so few of these companies make money, the traditional method of weighing a stock’s share price against the company’s earnings—the good old price to earnings ratio—simply makes no sense. Over the long term, however, there are alternative measures that may help you select a winner from a loser.
“The untapped potential of the Web makes Internet stocks unique. The winners so far have ignored financial performance and focused on moving quickly—spending any amount of money necessary to build a vision, and claiming as much Internet market share as possible. Internet market share is measured by surfers’ eyeballs. The more people that visit a site and the longer they stay all make a site more attractive to advertisers and investors, and creates greater untapped potential as those surfers are slowly converted to customers.
“The use of the first-ever Web site measuring stick, the hit, is still very popular. Web site counters are widely used on personal home pages and corporate sites but offer little insight into the value created by investing in a Web presence. Measurement of Web activity is no different than television’s use of Nielsen ratings or radio’s use of Arbitron. Second-generation Web measurements are much better than the hit count because one person is not counted over and over again.
“These Web-based measures include: unique visitors, reach, length of stay, registered users, click-throughs and repeat visits. The two most watched by investment professionals include unique visitors and length of stay. The former is often referred to as eyeballs and the latter is often called stickiness. With these measures, you can find out how many eyeballs stick around long enough to actually make a financial transaction.
“As you can imagine, the academic literature in this field is very sparse. However, we do know a few things already. For example, larger financial losses in Internet firms seem to translate into higher stock prices. Also, a company’s trading volume and share price are directly related to message-posting activity on stock chat boards in the period just before and during a company announcement. There’s also evidence that abnormal returns of 125 per cent or more have been realized for the 10 days surrounding a firm’s announcement that it is changing its name to an Internet-related dot-com one.”