Question

How would you value an Internet stock which is currently showing negative operating cash flow and negative net income?

Answer 1

An internet stock with negative operating cash flow and negative net income cannot be valued using cash flow analysis. Hence, alternative methods must be used for valuation. Alternative methods that could be used are :

• Comparative method - Peer companies in the same sub-sector can be used for comparative analysis. For example, an internet travel company can be compared with other internet travel companies. A relative valuation can be calculated using metrics such as customer base, revenue etc.
• GMV - Gross merchandise value, or GMV is another relative valuation method. The firm's GMV is an adjusted revenue figure, which can be used to compare internet companies. This method is useful for comparing platform-as-a-service companies, such as Amazon.
• Operating and Financial metrics - In the absence of cash flows and net income, key operating/financial metrics such as customer life value (CLV), customer retention ratio, average daily users, number of downloads etc. can be analyzed comprehensively to estimate a value for the company