Internet Business Valuation : Case Study of two Korean and two Swedish Internet Companies using Adjusted DCF Valuation Model

Abstract: Internet business valuation is a challenge because internet business has unique features and thus, needs to consider other issues than the traditional income statement and balance sheet numbers. Furthermore, many of the internet companies have generated negative accounting income in spite of extraordinarily high stock price. Given these circumstances, the advanced valuation model for internet business with consideration of the high growth potential capacity is apparently needed. This paper is designed primarily to review previous researches on the corporate valuation models as the theoretical background and then to select a possibly best suited valuation model for internet business among the presented models. Secondly, I apply the selected valuation model to two Swedish and two Korean leading internet businesses in order to check out the reliability of this valuation model as the empirical study. When it comes to the internet business, both countries have a pretty good internet infrastructure and a high internet penetration in both private life and business environment. Therefore, it could be interesting to compare how different the value of internet companies which have such common conditions is estimated with each other. For the empirical study, I employ the adjusted DCF valuation model and select four internet companies. Two Swedish internet Companies – Net on Net and Unibet - and two Korean internet companies – Interpark and Neowiz – are selected and each company is listed on the respective stock exchange – OMXS and KOSDAQ. The adjusted DCF valuation model is the traditional DCF model with capitalization of R&D costs and marketing expenses as investments. the adjusted DCF valuation model suits best for the valuation of the selected internet companies since they are online gambling provider and online retailer which put large sums in marketing expenditures. This intensive marketing effort in the end contributes to the high future growth. In this sense, the marketing expenditures should be considered as investment rather than costs. By the calculation of the NPV and the comparison with the stock price, I found that the companies with the high growth potential generate the higher NPV than the value derived from the stock price. On the other hand, the NPV of the companies with the moderate growth rate and the mature market situation remains at the almost same level of the stock price value. This empirical result shows that the adjusted DCF model gives the reasonable number and so indicates the high forecast capacity. Except Net on Net of which the NPV seems to be too high, the NPVs of the companies are well-consistent with the present stock price and the stock price change.