- Stock analysts consistently underestimate the future revenues
of Internet companies even though the data to make more accurate
predictions are accessible, according to a new study by three
accounting researchers at the Haas School of Business at the
University of California, Berkeley.
the study has found, the growth rates of Internet companies'
Web traffic and past revenues can predict the analysts' margins
study was produced by Haas School accounting professors Brett
Trueman, M. H. Franco Wong, and Xiao-Jun Zhang.
the importance of revenue predictions to the valuations of
companies, 90 percent of analysts' revenue forecasts fell
short of realized revenues, according to the study's authors.
For portal and content/community providers, analyst forecasts
were 9 percent below actual revenues, on average, while for
electronic retailers, known as e-tailers, they were 13 percent
findings of this study can potentially have a significant
impact on the way investors interpret and use analysts' forecasts,"
Haas School team found that the higher the growth in Web usage
- as measured by growth in unique, or individual, visitors,
the number of pages they view, and the time they spend on
the firms' sites - the greater the degree to which analysts
underestimate future revenues, particularly for the e-tailers.
Furthermore, the greater a firm's prior revenue growth, the
greater the margin of the analysts' underestimate, especially
for the portal and content/community providers.
profits and price-to-earnings ratios being all but useless
in valuing Internet companies, analysts have turned to revenues
and the price-to-revenue ratio to evaluate them. As a result,
revenue forecasts have become a critical and ever more important
tool in investment circles.
light of the emphasis on revenues in the valuation of Internet
stocks, we felt it was particularly important to understand
the roles played by analysts, Web traffic growth, and past
revenue growth in the forecasting of future revenues," said
researchers also examined a number of statistical forecasting
models that are based solely on past financial data. They
found that growth in Web traffic can predict errors even in
the best of these forecasts.
finding is particularly important when valuing firms with
little or no analyst coverage, such as small firms or those
that have recently gone public, as they, of necessity, rely
on historical financial numbers for forecasting purposes,"
study was motivated by previous work on the valuation of Internet
stocks conducted by these professors. In "The Eyeballs Have
It: Searching for the Value in Internet Stocks," they found
that investors pay particular attention to an Internet firm's
revenues, cost of revenues, and Web traffic, in determining
the market value of these firms.
Metrix provided the data on unique visitors as well as the
data used by the researchers to calculate page views and minutes
spent at a firm's Web sites. The study sample included 95
publicly traded e-tailers and portal and content/community
providers over the period from October 1998 to December 1999.