The high-profile flotation of Snap Inc, the business behind disappearing messages app Snapchat, for $28bn – just a few months after Microsoft acquired LinkedIn for $26.2bn – serves not only to underline the huge value placed by investors on a company’s potential, but also the rather arbitrary world of business valuations (since the Snap initial public offering, investors have become concerned it might never become profitable).
This means it’s entirely feasible that such businesses could be worth more than those with established business models and tangible assets, says Managing Director Jeffrey Davidson.
“With a bricks-and-mortar company one can usually see what gives it its value, but growth is slow,” he says. “Each new customer needs to be fought for and worked on. The investment in each brick is quite high. The investment in each additional customer of a tech company is virtually nil, and the growth trajectory can be stupendous.”
Yet it is a double-edged sword. “The problem is that the overall marketplace might not have enough space for every technology to succeed, or for every successful ‘free’ technology to attract income-generating activities,” he adds. “In value terms, companies competing for market share of social media, advertising or cross-selling are either going to be huge, or nothing. There’s not really much in between.”
Read the full article in economia here