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 companie
s are classified into portfolios according to above-median and below-median
traffic data, the more popular sites provide significantly better stock re
turns than the less popular sites. These results may be explained by the su
perior ability of popular sites to attract advertising revenues and extract
greater compensation from affiliated sites. They may also indicate investo
rs' perceptions that the move popular sites have greater network externalit
ies tin which the value of being a part of the network increases with the n
umber of members already in the network) and have the ability to generate h
igher future profits and cash flows. These results carried through to offli
ne companies with Internet sites in 1999 but not in 2000, possibly because
the online operations of offline companies were still not a material compon
ent of the companies' revenues and cash flows.