Agenda

1
Agenda

• Technology Adoption
• Behavior of stock valuations
• Value Drivers
• Trading Strategy
• Q A

2
Technology Adoption

• Structural shift taking place
• Adoption rate stands at 45.3
• Continued growth but decreasing rate
• Old-economy versus new-economy - Growth
• Traffic dependency

3
Technology Adoption
Exhibit 3 Technology Adoption Curves (Peter
Brimelow, The Silent Boom, Forbes, July 7,
1997)
4
Technology Adoption
Exhibit 9 - Current state of Internet Adoption
measured as a percentage of total households
online
5
Behavior of Stock Valuations

• End-state MCAP as purse
• Current stock prices as odds
• Common stock as call option on future value

6
Behavior of Stock Valuations
c S N(x1) PV(k) N(x2)
Volatility and time to exercise date
7
Behavior of Stock Valuations
MCAP TV N(x1) PV(LTD) N(x2)
NETWORK EFFECTS and time to end-state
8
Behavior of Stock Valuations

• LTD prevents quantification, but
• Schwarts and Moon (1999) say variance of the
  distribution of future growth rates is important
  in the valuation because it determines the option
  value of the Internet firm higher growth rates
  lead to larger cash flows, which imply a more
  valuable firmin contrast, if growth rates are
  sufficiently low, the firm may go bankruptif the
  firm goes bankrupt, it will be worth zero if
  growth rates are just low enough for the firm to
  go bankrupt or even if growth rates are far lower
  than that critical level

9
Understanding Value Drivers

• Schwartz and Moon (1999)
• depending on the parameters chosen, the value of
  an Internet stock may be rational, given high
  enough growth rate in revenues.
• Hand (2000)
• sales and marketing and research and development
  costs are valued by the market as assets
• Rajgopal, Kotha and Venkatachalam (2000)
• web traffic creates future growth potential
  through network effects and customer
  relationships that do not necessarily result in
  current realized revenues
• Importance of REACH

10
Understanding Value Drivers
Exhibit 4 Value Drivers for Internet Firms
11
Trading Strategy - parameters

• Traffic-dependent firms
• 30 firms mainly from ISDEX Internet index
• PC Data Online REACH parameter available Feb-99
• Assume 6 per trade
• Benchmark against buy-and-hold and ISDEX index
• Buy positive REACH growth stocks only at
  beginning of following week sell all at end of
  week.
• Compare average weekly returns and total growth
  of one dollar
• Assume a 100,000 portfolio to mitigate
  transaction costs

12
Trading Strategy - parameters
Exhibit 6 Stocks included in trading
methodology
13
Trading Strategy - parameters
Exhibit 8 Number of stocks in sample over time
14
Trading Strategy - results
Average Weekly Return
One Dollar Growth

• Buy-and-hold strategy return
• ISDEX return
• Positive REACH growth buy strategy

1.15
1.58
1.53
1.95
2.04
2.34
60 Hit Ratio
15
Trading Strategy - results
Exhibit 7 Return on one dollar invested at
beginning of sample period