The Importance Of Earnings Forecasts, Sales Forecasts, And Cash Flow Forecasts To Stock Price Forecasts

Abstract

The spectacular rise and fall of internet company stock values has called into question the rationality of the traditional earnings-based valuation models for internet companies. Unlike many “old-economy” companies with stable revenue and earnings streams, internet companies often exhibit little current revenues and substantial negative earnings, yet they command very high prices. One plausible explanation for this phenomenon is that the value of internet companies is driven by the expected future growth opportunities. Accordingly, this paper examines the relative importance of sales forecasts, cash flow forecasts, and earnings forecasts to stock price forecasts of internet companies. As predicted, only cash flow forecasts and sales forecasts are significantly associated with stock price forecasts. That is earnings forecasts are not relevant to stock price predictions of internet companies.