I think it has to do with PR and backlinks...I have seen other sites similar that use the same algorithms...jmo though.
It's out by one or two couple of decimal points for my sites. I think the weakness of this tool is that it doesn't take into account the industry sector and website type. This could be pretty easy to fix: a couple of drop-down boxes to select what kind of site yours is, so the estimate could be adjusted accordingly, and this tool could be made much more accurate. For example, it's a lot easier to get backlinks for a blog than it is for an ecommerce site, but if both had the same amount of links coming in then the ecommerce site might be worth 20 times as much. And a website about luxury cars will be worth more than one about low-cost items such as books. Perhaps being able to select the average unit cost of the things on your website, and then adjusting the valuation accordingly, would make this a better tool?