The Internet Enterprise Value Assessment Based On Real Options

With the overall popularity of Internet hardware and infrastructure,More and more Internet enterprises have achieved great success with their innovative business models and advanced scientific and technological strength.At the same time,IPO,financing,mergers and acquisitions of Internet companies have become common.All kinds of capital have been engaged in the internet economy.But a large number of internet companies went bankrupt after several times of financing which make many investors suffer severe losses.So there is a huge bubble in the internet economy.How to evaluate internet companies effectively and objectively is not only important for the business managers,equity investors and venture investors,but also the need to ensure the healthy and stable development of the internet economy.The internet companies features short development cycles,rapid changes,unstable cash flow,weak profitability,less comparable companies,which make the relative valuation method represented by P/E ratio and P/B ratio and the absolute valuation method represented by discounted free cash flow have very obvious shortcomings in evaluating the Internet companies.Therefore,it is extremely urgent to explore a more practical and effective method than the traditional evaluating methods for the valuation of Internet companies.After a comprehensive analysis about traditional value assessment methods,real option methods and internet companies,this paper considers that the option theory has superior advantages in the calculation of the value of uncertainty and high risks.At the mean time the real options theory can fully tap the value of the potential investment opportunities and management flexibility.Internet companies are typically high-risky,flexible,and non-linearly developed companies.This paper proposes to apply the real options method to the evaluation of internet enterprise value,and Jingdong Company is selected as the case study object,and the Black-Scholes model is applied in the valuation process of Jingdong company.This paper first reviews the domestic and international theoretical research results in the field of enterprise value assessment and real options.Secondly,this paper introduces the traditional enterprise assessment methods,as well as the limitations of traditional enterprise assessment methods,and through the comparative analysis of some listed internet companie' the stock issue price and stock price performance after six months from the issue date proves that the traditional valuation methods can not effectively evaluate Internet companies.Next this paper analyzes the characteristics of Internet companies with high investment,high risk,high profit,strong innovation,significant externality which are different from those of traditional enterprises,the sources of internet companies' value,the features and difficulties of valuation of Internet companies,such as the difficulty of predicting cash flow,the difficulty of comparable companies,and the difficulty of quantifying intangible assets,and introduces the real options theory.Then this paper reviews the real options theory,points out the real option characteristics of Internet companies,identifies the real options of Internet companies,and introduces two mathematical models of real options: Black-Scholes model and binomial tree model,analyzes and compare the two models,selects the Black-Scholes model as the valuation model of this paper,analyzes the assumptions of the Black-Scholes model and determination of parameters.Finally,this paper introduces a case analysis of Jingdong company,using the Black-Scholes model,P/S valuation method and P/B valuation method,calculating the value of the company,obtaining valuation results from the three methods,and analyzing the deviation between the three valuation results and the stock price.In order to make the research conclusion more convincing,this paper increases four sets of samples,analyzes the deviation between the valuation results and the stock price of the sample companies.The results show that the real option method can effectively assess the value of Internet companies and has guiding significance for the evaluation of Internet companies.In the case study,this paper analyzes the influence of the parameters on the valuation results,clarifies that a careful and scientific approach should be taken in the estimation of key parameters: the present value of assets,points out that the applicability of the real option method to the valuation of Internet companies with severe performance declines needs to be further studied.We hope to make some contributions to improve the enterprise value assessment methods,at the same time,making useful explorations in internet enterprise value assessment and enrich the research results of our real options theory.