The Relevance of Traffic for Internet Stock Prices

By Shivaram RajgopalSuresh KothaMohan Venkatachalam
2000| Working Paper No. 1616

We find that web traffic is relevant for explaining market values and stock returns of pure Internet companies after controlling for accounting information such as book and values earnings. However, we find weak associations between web traffic and sales levels and sales growth. We conjecture that traffic creates future growth potential through network effects and customer relationships that do not necessarily result in current realized sales revenues. We provide preliminary evidence in support of this conjecture by documenting strong associations between acquisition prices and website traffic for a sample of Internet acquisitions.