Valuing Technology Stocks With EVA: A Bridge Too Far?

Abstract

The Economic Value Added (EVA™) framework has engendered a great deal of attention from American and European companies, consultants, accounting firms, security analysts, fund managers and the media for its purported utility in accurately valuing public companies.  In 1996, for example, Fortune Magazine trumpeted that hundreds of companies had recently “renounced” earnings per share in favour of EVA™ as a means of measuring performance and driving stock prices.  During the 1990s, investors witnessed unprecedented growth in US equity prices, particularly for technology firms.  This case study critically examines the Economic Value Added EVA™ framework and attempts to rationalize the bull market in technology stocks by employing EVA™ to estimate the intrinsic value of a large proportion of the US technology sector as of 1999 and comparing this figure with contemporaneous market values for the same.  We find a marked disparity between EVA™ estimates of Present Value and actual market value for the sector.