How to Value Stocks: Member-Based Valuations

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Sometimes a company can be valued based on its subscribers or its customer accounts. Such subscriber-based valuations are most common in media and communication companies that generate regular, monthly income -- like cellular, cable TV, and online companies.

Often, in a subscriber-based valuation, analysts will calculate the average revenue per subscriber over their lifetime and then figure the value for the entire company based on this approach. For instance, say a cable company has 4 million members, each of whom spends an average of $100 per month. Each member, on average, sticks around for five years. Using a subscriber-based valuation, you could say that the company is worth:

            4 million * $100/month * 60 months = $24 billion

This sort of valuation is also commonly used for Internet service providers and cellular phone companies.

Another form of subscriber-based valuations is based on accounts. In the health-care informatics industry, companies are routinely acquired based on the value of their existing accounts. These acquisitions often completely ignore the past earnings or revenue of the company, instead focusing on what additional revenue could conceivably be generated from these new accounts.

The exact mechanics of member-based valuations are unique to each industry. Although this type of valuation may seem rather confusing, studying the history of the last few major acquisitions can tell an inquisitive investor how the member model has worked in past mergers and can suggest how it might work in the future.

For more lessons on valuation methods, follow the links at the bottom of our introductory article.