The sheer size of the digital revolution

Is Digitalization real? Of course IT is present everywhere in our daily lives, everywhere globally. But how big of a deal is it? Lets answer this by looking at market evaluations of still privately held tech start-ups compared to the old economy.

Lets start with Uber, the ride sharing app. Uber has been worth about 51 Billion Dollars at the end of July 2015. That is a very steep price for a ride sharing app. Stock valuations have been hyped before and bubble may burst. Is Uber’s valuation just an outlier, not representative for the digital revolution? Lets have a look at the most valuable privately held companies in January 2015:

Uber is still big, but there are newer companies with already massive valuations. Who has heard of Xaomi? Xamoi (translated into english “little Rice”) is a chinese mobile phone manufacturer how is an excellent example of digitalization – a case studied in an upcoming post. While Uber may still be overrated, there are others to fill the place. And Uber does not appear too overrated when compared to public tech companies by December 2014.

Bildschirmfoto 2015-10-27 um 08.25.51

After all, Uber is aiming to be the company claiming the lead position in the transportation market. Similar to amazon, which is the place to go for shopping, Uber is poised to be the place to go for transportation needs – globally.

But all tech stocks may be overvalued. After all, in an era of near 0% interest rates all this cheap money is inflating assest evaluation. But this money is inflating the value of the “old economy” too. Already at the end of 2014 Uber has been worth more than 72% of the worlds most valued companies (the Fortune 500). These include household names such as Kraft, Hertz, Halliburton, KKR, Hilton etc.

In July 2014 50% of the top 10 most valued US companies are tech companies. Not over-hyped companies like possibly Uber, but companies that are here to stay: Apple, Microsoft, Google, Facebook and Amazon. The smallest of them, Amazon, has been valued at nearly 248 Billion $ in July 2014 and is at the time i write this (28th October) valued at 285 Billion $ (click here for current valuation of Amazon). The old economy, even “old” tech companies like Intel or Oracle, are left in the dust.

The absolute height of the market capitalization is likely to be a bubble. Even the relative evaluation of tech companies vs. others is likely in for a correction. But given the track history of tech companies over the last 20 years and the just unfolding potential of information technology, we are looking at single companies been thrown back into obscurity, but the “new economy” is here to stay.

Not only the size of market capitalization points towards the existence of a digital revolution. According to Innosquare, the lifespan of a Standard & Poor 500 Company measured by the time listed in the S&P 500 Index went down from 61 years in 1958 to 18 years in 2013. At the current rate, all S&P companies will be replaced by new ones in 2027. Most of these vanishing companies leave the S&P 500 Index as they are bought through Mergers and Acquisition (see “The mortality of companies“, a 2015 study). This however is likely to be more correlated to the massive modern financial markets, cheap money and capitalisms incentives towards ever more Mergers & Acquisitions. But without deploying digitalization as a tool to increase market capitalization, a company will rather sooner than later fall prey to a takeover.

So what’s in for a traditional company? Digital transformation obviously offers tremendous potential for growth and profit. But after all, digital is a tool and – according to Bill Gates: “A fool with a tool is still a fool”. Key is to learn why, how and when to use these tools in an orchestrated manner. Alas, this is what this blog is all about.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *