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Change of era: why companies with very few years of existence are already worth much more than traditional ones

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    09 March 2022

Why are relatively young technology companies more valuable than traditional ones?

In recent years, the advance of technology has changed consumption habits around the world. Thus, relatively "young" companies have become the most valuable on the planet.

Firms such as Apple, Microsoft, Amazon, or Facebook are the faithful reflection of this phenomenon. The same happens with Argentine companies that, born from the hand of new technologies, have a market value higher than that of traditional firms with "historical" brands.

One of these cases is undoubtedly that of Mercado Libre. The company founded by Marcos Galperin, based on e-commerce, has a market capitalization of $55 billion. Although its shares have fallen more than 20% in the year on Wall Street, its market valuation is much higher, for example, than that of IRSA, owner of the most important shopping malls in the country ($300 million).

In the financial world, there are plenty of examples. In August, fintech Ualá achieved a valuation of $2.45 billion after a $350 million investment round. Its "traditional" rivals in the country have a market capitalization up to eight times lower in the New York market, such as Banco Macro ($845 million) or Grupo Supervielle ($342 million).

Globant, on the other hand, has a market capitalization of almost $10 billion, which places it far above a flagship of the Argentine economy: YPF ($1.5 billion).

Another example can be seen in the world of travel: Despegar is valued at $650 million, while Latam, one of the largest airlines in the region, has a market cap of $246 million.

A globally recognized case is that of Tesla, Elon Musk's electric car manufacturing company. Its market valuation exceeds $900 billion, far above two historical companies in the sector such as General Motors ($77 billion) and Ford ($82 billion).

According to Gustavo Domínguez, CIO of Adcap Grupo Financiero and co-founder of Banza, "the main reason why many young firms have higher values than other more legendary ones is that it is difficult to assess them in terms of potential growth, profitability, and earnings to be generated, as they are based on completely new technologies."

As a result, "traditional valuation methods can be wrong: comparing new companies, based on technological innovations, with traditional ones makes one think that they have very high price-to-earnings multiples."

"For some that are already older, such as Amazon, Microsoft, or Tesla, those who invested from their inception celebrated returns of between 2,000% and 3,000% in the last 20 years. This happens quite frequently in new companies, especially if they were disruptive. That is, in their origins, the final impact on the business and consumers was unknown," says Domínguez.

The specialist highlights that, as a consequence of this, "the initial volatility of the price of these stocks may be greater than that of many traditional ones" because:

  • "Fluctuation in investor expectations is wider"
  • "There is enormous uncertainty about whether their business model will be validated and generate the expected returns"
  • "The company is capable of maintaining the right course until it achieves its consolidation or if it turns to something different"

"The best example of this is Amazon, which started by selling books on the Internet and today is the largest retailer in the world. It sells everything, has cloud computing and pure technology businesses, in addition to marketing products and services," he adds.

Beyond the valuations of technology companies, a series of factors in the global economy have slowed the rise of their stocks in recent weeks, and many have indeed presented appreciable declines. The possible rise in Fed rates is one of them.

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