Internet Traffic and Portfolio Returns

We examined whether traffic data on sites owned by publicly listed Internet companies provide information about the future of those companies that is useful in portfolio management. The study shows that when Internet companies are classified into portfolios according to above-median and below-median traffic data, the more popular sites provide significantly better stock returns than the less popular sites. These results may be explained by the superior ability of popular sites to attract advertising revenues and extract greater compensation from affiliated sites. They may also indicate investors' perceptions that the more popular sites have greater network externalities (in which the value of being a part of the network increases with the number of members already in the network) and have the ability to generate higher future profits and cash flows. These results carried through to offline companies with Internet sites in 1999 but not in 2000, possibly because the online operations of offline companies were still not a material component of the companies' revenues and cash flows.