Valuing Internet companies: a DEA-based Multiple Valuation Approach

Ho C-Tb, Liao C-K and Kim H-T
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Ho C-Tb: National Chung Hsing University, Taichung, Taiwan
Liao C-K: National Chung Hsing University, Taichung, Taiwan
Kim H-T: Nottingham University, Nottingham, UK

Journal of the Operational Research Society, 2011, vol. 62, issue 12, 2097-2106

Abstract: The Internet industry has created a great deal of marvels over the past decade. Assessing Internet companies’ values provides an alternative tool to help make better investment decisions. This paper presents a hybrid of both DEA and multiple valuation methods to valuate Internet companies. Four tailored valuation methods were proposed and a sample of 52 firms was tested based on Price-to-Gross Margin ratio. With the focus on the estimation direction (overvalued/undervalued), verified with the real prices, an accuracy rate of approximately 70% on average has been obtained from these four methods. The proposed methods allow investors to have a more accurate estimation of the subject company's current and future stock prices. This implies that the research results could help investors when they are making long-term or short-term investments.

Date: 2011
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