Dot.Com Bubble

1790 Words8 Pages
R&D, Advertising and the Market Value of Internet Firms By: Damir Tokic Outline: 1. Introduction 2. Article Summary 3. Discussion 4. Conclusion Introduction During the Dot-com “bubble”, internet firms were highly valued compared to “old economy” firms. Internet firms’ stock prices were unrealistically high. Most of those firms were operating under loses and no tangible assets to warrant those prices. Analysts justified those prices and recommended buy ratings but later a crash followed. Article Summary This article explains the relationship between intangible assets (advertising and R&D) expenditures and internet firms’ market value during 1996-2000.The author presents two opinions in regard to internet…show more content…
It may pay off to undertake R&D investments in a project with negative value if the early investments provide sufficient information about the future benefits of a project. The value of an internet firm is largely dependent on (1) firm’s ability to adapt to enormous uncertainty, (2) competitive landscape paced with technology innovations,(3) changing market conditions and (4) costs of searching for a profitable business model. Valuations can be extremely high if the initial growth rates are high and if there is enough volatility in this growth over time, The author’s argument is that high valuation of internet stocks is attributed to the investment opportunities approach. This approach suggests that the presence of growth opportunities to invest new capital results to projects with a promising rate of rate return higher than normal. The investment opportunities approach states that value of a growth firm is equal to the PV of cash flows from assets in place and the present value of “growth” opportunity (Vj = V1 + V2). It suggests that investors should pay a premium for earnings of a growth firms relative to mature firms due to the presence of profitability multiplier in growth firms.The author proposes a modified investment opportunities approach which incorporates advertising and R&D into the equation when valuing growth firms; V = E/k m + RD+A/k (m-1). This is
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