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Example research essay topic: Ecommerce Companies And Stock Valuations - 1,451 words

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eCommerce Companies and Stock Valuations A hot topic in todays business culture is eCommerce. Experts argue about whether eCommerce will change business, whether or not it is a fad, and what viable strategies there are in a business world that is changing at the speed of idea generation. One thing that nobody argues about is the fact that eCommerce oriented companies have stock prices and market capitalization's that are enormous. Based on losses rather than earnings, some of these stock prices are inexplicable. This paper is a thought experiment that attempts to gather and disseminate data regarding these stock prices. Additionally, the paper will attempt to propose solutions and reasons for the current market trends relative to eCommerce companies. 2.

Discussion of the eCommerce business models When discussing eCommerce, it is good to have a frame of reference. As a result, it is interesting to review the common models associated with the field of study. Generally, there are two widely recognized business models regarding eCommerce. These models include the B 2 B (Business to Business) model and the B 2 C (Business to Consumer) model. The fundamental question regarding these models is: is the specific model in question a revolutionary way of doing business, and hence a new business model; or is the specific model in question a facilitation of a mature business model. Depending on which model you are discussing you may get different answers.

The B 2 B model is much more common. B 2 B eCommerce is roughly five times more prevalent than B 2 C eCommerce. Following is a discussion of the models, and answers to the above question. To reiterate, it is important to decide whether or not B 2 B is a fundamentally new business model, or a facilitation of existing business models. It is easy to answer this question when one looks at history.

The fundamentals of B 2 B eCommerce have actually been around for decades. B 2 B eCommerce is the new en vogue term for supply chain management in the majority of forms in which it is implemented. In reality, supply chain management has been around since the Industrial Revolution. It has just become expedited with the advent of communications technology: the telegraph, the telephone, the computer, easily designed software, LANs and WANs, EDI, and now the Internet and eCommerce. B 2 B eCommerce does not change the majority of business models developed for intra-business commerce. It simply facilitates the process by offering information more quickly, more timely, and more accurately.

However, there may be an opportunity with B 2 C to do more than just facilitate old processes. The advent of B 2 C has created a new competitive landscape. The strength of the Internet is dispersion and dissemination of information on a large expedited scale. Consumers can access information quickly and so can organizations and businesses. B 2 C eCommerce has the following positive attributes for consumers: Consumers can access product and service information quickly and efficiently Browsing, ordering and purchasing are virtual and therefore expedited Informational asymmetries are broken down and markets are more efficient and competitive Time saving allows more time for leisure activities B 2 C eCommerce has the following positive attributes for businesses: Companies can gather information about their customers easily Based on better consumer profiles and information systems, companies can engage in market micro-segmentation Costs can be reduced due to less brick and mortar rental and construction expenses, less SG&A, fewer print ads, more focused marketing efforts, better defined advertising, and potentially lower inventory holding costs based on augmented demand predictability Companies can reach more and more potential customers because the customers ability to purchase is not bounded by geographical parameters associated with traditional business models such as brick and mortar However, there are negatives aspects of eCommerce for both the consumer and the business proprietor. The customer gives up a certain amount of anonymity when he / she allows information to be collected about him / her .

This information can be used for questionable and leveraged positions by businesses. A consumer may experience information overflow. From a business perspective, the availability of information to the customer is dangerous to a certain extent. Perfect information implies perfect competition. Perfect competition implies low or non-existent margins, and therefore minute profits and earnings. This is especially true of commodity-oriented products.

Successful eCommerce oriented businesses need to position themselves as an e Chain solution in order to compete on bundled goods and relationships. Although there is downside potential for B 2 C eCommerce businesses, these are the companies that have caught the eye of the media and the public. With companies like Amazon and eBay earning little or no profits, but deriving huge market capitalization's; it makes B 2 C interesting to study from a stock-pricing standpoint. The rest of this paper is dedicated to answering that question: what drives large stock prices and market capitalization's for B 2 C eCommerce companies that have made little or no profits. In terms of understanding the pricing of eCommerce stocks it is important to review classical financial and economic models. Every investment bank on Wall Street has its own method for valuing publicly traded entities.

The following sections are a general overview of some of the models that are traditionally used. Evaluating these models will help to determine the reason for the strange valuations of todays eCommerce companies. Additionally, reviewing the models may help to propose a new model. 3. 1 Standard DCF (Discounted Cash Flow) Model Perhaps the most widely used valuation model is the standard DCF. Essentially, this model uses the net present value of future cash flows to determine a reasonable market capitalization for a company, and then divides that number by the number of shares to derive a stock price.

The net present value of the cash flows is computed by determining the cash flows and discounting them at some reasonable rate. In essence, there are two critical variables in this model: cash flows and the discount rate. There are numerous things to consider regarding cash flows, which include dividends, plow back ratio, and earnings. For the purposes of reviewing eCommerce companies, dividends and plow back ratio have negligible relevance in the analysis at this point of the eCommerce evolution. However, earnings are fairly critical. Fundamentally, it is interesting to consider what future earnings a company needs to have to justify its stock price, which is a function of cash flows.

Based on that analysis, one of two things occurs in the valuation model relative to companies like Amazon: you have to make wild assumptions about the future economics of the eCommerce space, or you need to violate traditional non-negativity constraints imposed on the discount rate. However, it is reasonable to evaluate each option. Some experts have estimated that Amazon and companies like it would need to grow at phenomenal rates in the future to achieve a cash flow that would justify its current market capitalization. This estimation is as high as 200 % growth every year in the next twenty years. This puts Amazons market share at anywhere from three to ten percent of GNP in twenty years. Other analysts argue that a future 30 % share of a $ 230 billion market, with a five percent profit margin values Amazons market capitalization at $ 150 billion.

Based on this analysis, Amazon is trading at a bargain with a roughly $ 15 billion market capitalization. Discount rates are even more interesting. The discount rate is the rate at which cash flows are adjusted. These rates reflect expected rates of return and risk measurements. Defined by Belly and Myers, The rate of return is the reward that investors demand for accepting delayed payment. Usually, this number is not greater than one because this would imply that a dollar today would be worth less than a dollar in the future.

Additionally, the discount rate is not normally less than zero. It is interesting to evaluate what a discount rate less than zero implies. In order to use a DCF model for companies with negative earnings, this is an assumption that could be applicable. Thus, negative earnings, and therefore cash flows divided by a negative discount rate yields a positive number. A negative discount factor implies that an investor is willing to pay for the right for a company to take its money. This is analogous to paying a cover charge to enter a casino.

However, there are similarities to both: as a gambler you have almost unlimited upside potential, but generally the house or insider always wins. In the later section briefly discussing day trading, we will explore this issue further. Peter Lynch has r...


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Research essay sample on Ecommerce Companies And Stock Valuations

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