Valuation of Digital Platforms: Valuing Companies with Negative Profits and Millions of Users

Kasper Tengel Hessellund & Thor Klysner Sørensen

Student thesis: Master thesis


In this thesis, we investigate how to evaluate the strategic potential of digital platforms, in terms of their ability to scale and monetize user activity, and we examine how an intrinsic user-based valuation approach can assist investors in estimating the enterprise value of such companies. In the process, we construct a framework around our findings, which we apply in two case studies by valuing Spotify and Lyft, respectively. In terms of platform strategy, the findings suggest that there exists a tradeoff between scaling and monetizing users. In order to assess a platform’s potential to scale user activity, it is found particularly important to evaluate its capability to leverage network effects; both positive/negative same-side effects, as well as positive/negative cross-side effects. In terms of evaluating monetization potential, it is found that monetization causes frictions with network effects, and thus analyzing the growth and profitability implications from such frictions, and how to alleviate them, is essential. In terms of platform valuation, the presented user-based valuation approach distinguishes between value of new users and value of existing users, enabling investors to assess if a platform’s investments in customer acquisition are paying off. Furthermore, the user-based valuation approach produced valuable, user-specific insights about where the value is created. Particularly, it became clear that, across both cases, the majority of the value was generated from new users. Finally, it enabled user-specific sensitivity-analysis, which provided concrete insights about the value implications from changes in key variables such as user growth, ARPU1 growth and churn rates. The Lyft and Spotify case studies demonstrated that a user-based valuation approach can indeed help mitigate some of the challenges associated with valuing digital platforms. That being said, because of information nondisclosure and opaque accounting practices, valuing platforms based on user data has practical limitations

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages164