Warren Buffett, the president of Berkshire Hathaway Inc. and one of America’s most storied investment managers, remarked last year that if he were teaching an MBA class on finance, the final exam would have one question: “How do you value an Internet company?” He said anyone who turned in an answer would fail.
Clearly, it is extremely difficult to value e-commerce companies on their assets or profits, because most of these companies have little of either. Indeed, even multipliers of revenue are difficult to assimilate into any sensible financial valuation model. Yet, the price appreciation of e-commerce stocks in the past two years has been phenomenal, reaching a one-year gain of nearly 100% and a five-year gain of 1,100%, creating market capitalizations surpassing even some of the most widely held and admired growth and retail companies on the New York Stock Exchange.1
As of April 20, 2000, the market capitalization of Amazon.com Inc. was a stunning $18.3 billion — even though the company claims merely $1.6 billion in annual revenue and has never earned a profit. EBay Inc.’s market value was $19.6 billion, despite its unremarkable $11 million profit on merely $225 million in 1999 revenue. To put these dot-com valuations in perspective, consider the mere $14.2 billion market value of Sears, Roebuck and Co.,... To read the complete article, login or sign-up using the form below.
Get a premium subscription today to read this and all MIT Sloan Managmeent Review articles.
More Info.
Buy this article. Purchase one or more copies of this article as a PDF.
Subscribe today to read the most recent articles and the current issue of MIT Sloan Management Review.
Upgrade to premium
Current Subscribers: Do you subscribe to MIT Sloan Management Review? Register for online access.
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription—access to the entire archive of articles.
