1、Internet Stocks: Value and Trading Strategy,Rob Freund Petter Hellman Ole Hvidsten Jiong Shao Rick Solano,Main Points,Value in theory Internet shortcomings for traditional value Modifications to theory for Internet stocks Trading strategy Conclusion Questions,Value in Theory,Investors want money Ind
2、ustry growth vs. age curve New industry - growth important Mature industry - returns important,Graph,Internet Shortcomings,Modern valuation theory created during a time when there was no emerging society- convulsing technology Valuation theory based on earnings and net income. Internet terminal valu
3、es are unclear. Cant use current performance to extrapolate future performance.,Laying Odds on Success of Firms Value Proposition,Total Market Capitalization of Industry (e.g. Retail: $1.45T %, FCF Margin = 5%),Expected Market Cap position of firm (PV $) (e.g. Amazon: Market Share = 10% MCAP = $145B
4、),Current Market Cap of firm (e.g. Amazon MCAP as of 8-31-99 = $14.14B),Current Value of firm using existing financial performance baseline (e.g. Not Applicable - no earnings),Bet placed by investors,Payoff to investors if firm successful,Price of bet influenced by factors affecting expected future
5、outcome (e.g. starting QB breaks leg day before Superbowl) - IN THIS CASE, MARKET HAS SET 10-1 ODDS ON AMAZON CROSSING THE FINISH LINE IN THIS POSITION,Hypothesis for Future Returns,We must find a proxy to indicate the potential for future income. Potential proxy candidates: MCAP/Sales PSSG PSSA Sal
6、es growth,Trading Strategy,Sort stocks during a particular time period and pick top 25% Stock sorted on the income proxy Positions taken at the end of the second month following the quarter used for analysis Returns calculated over three month holding period Stock returns were compared to a “buy and
7、 hold” strategy of stocks included in the H & Q Internet Index,Results,Index,Conclusion,Must use a proxy for earnings A buy and hold strategy can be beaten Current value is based on investor perceived future potential,Questions?,Industry Growth vs. Time,Time,GrowthRate,Return,Results of Various Sort
8、-Trading Strategies,Using a simply MCAP to Sales ratio to sort yields the highest return,MCAP to Sales and Sales Growth Ratio,Incorporate sales and sales growth into a valuation parameter Based on PEG (price to earnings and earnings growth) Formula - MCAP/(S*DS) As the firm/industry matures, growth
9、declines, so actual sales must pick up the value slack,H & Q Internet index,Due to MCAP weighting - the index return has been significantly skewed by a few extraordinarily successful stocks,Traditional vs. Internet,Traditional Players exist and stable Market size identifiable Can estimate terminal value because market size known Extrapolate current performance based on short-term management guidance Internet Terminal value unknown Cant use current performance to extrapolate Factors determining mature market performance Margins Market Size Market Share,
