Analysts label stock markets “bubbles” when market prices appear to lose contact with intrinsic values. To many analysts, the run-up in the prices of internet stocks in the US market in the 1998–2000 period represented a bubble. During that period, many analysts adopted P/S as a metric for valuing the many internet stocks that had negative earnings and cash flow. Perhaps at least partly as a result of this practice, some internet companies engaged in questionable revenue-recognition practices to justify their high valuations. To increase sales, some companies engaged in bartering website advertising with other internet companies. For example, InternetRevenue.com might barter \($1,000,000\) worth of banner advertising with RevenueIsUs.com. Each could then show \($1,000,000\) of revenue and \($1,000,000\) of expenses. Although neither had any net income or cash flow, each company’s revenue growth and market valuation was enhanced (at least temporarily). In addition, the value placed on the advertising was frequently questionable.

As a result of these and other questionable activities, the US SEC issued a stern warning to companies and formalized revenue recognition practices for barter in Staff Accounting Bulletin No. 101. Similarly, international accounting standard setters issued Standing Interpretations Committee Interpretation 31 to define revenue recognition principles for barter transactions involving advertising services. The analyst should review footnote disclosures to assess whether a company may be recognizing revenue prematurely or otherwise aggressively.