Information economy: why the cost of technology companies is so high

    Investors are increasingly choosing to invest in intangible investments, rather than companies producing industrial equipment, equipment and other tangibles. Companies in the United States own intangible assets, the total amount of which exceeds $ 8 trillion . This is almost half the cost of the S&P 500 at the time of the study. Intangible assets consist of rights, relationships and intellectual property. But among them, a special form stands out - developments that have arisen as a result of R&D expenses. They constitute the main income of any modern organization. This is confusing for the investor. The fact is that the current mechanism cannot adequately relate such benefits to the price of the company.

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    The accounting methods and valuation methods used in the 21st century are poorly suited for intangible assets and distort their value.

    The Market Mogul has published an interesting article on why the capitalization of technology companies in recent years is at very high levels. We have prepared an adapted version of this material.

    How business valuation is formed in the 21st century


    Accounting policies that organizations use to manage their economic processes are not suitable for modern intangible assets. This creates a cause for concern when valuing stocks. Regulatory instruments, such as IFRS, only recognize intangible assets at the time of a transaction , such as a purchase. Such a standard does not take into account intangible assets of a company that form its shareholder value. Significance increases when out of $ 89 trillion in enterprise prices, $ 30.1 trillion is considered “undisclosed value.”

    In addition, cost classification may not accurately reflect certain measures that directly affect valuation, such as discounted cash flow. The main expenses that stimulate information development are R&D. In the financial statements they are reflected as operating costs, although inherently they create long-term economic benefits. If you manually reconfigure profit and loss statements and post R&D expenses as capital costs, a more accurate picture of the company's income is created.

    The analyst can use several options for smoothing out inaccuracies arising from inappropriate methods of accounting, namely, profitable and market approaches. The first of them reveals additional cash flows that arise due to the use of data in the production process. The second, to take into account the differences in intangible assets, considers transactions associated with their transfer between firms.

    However, using these methods, it is difficult to understand how intangible assets affect cash flow. In addition, market data about them is not publicly available and is largely dependent on adjustments. This makes the valuation of modern companies increasingly complex. In the long run, a system is needed that will allow you to evaluate information quantitatively, which leads to a side effect for the stock market.

    Main problem


    The fundamental problem is the inability of the price mechanism to work with something unlimited. The modern economic system does not take into account that the costs of the data necessary for the production of goods will tend to zero . Companies do not need to recreate a few lines of code and copy information. Consequently, natural market mechanisms cannot create price.

    Although some studies show that data consumes processing power when removing a “ one bit, ” a more reliable system is required to capture the value.

    The solution is likely to lie in the classical pricing theories associated with the large calculations that have become possible due to today's computing power. For example, approaches like value theory can be used to confirm profits and measure the effort put into creating a product or service. The latter are considered to be spent on production hours or cognitive activity, which stimulates creativity, ingenuity and other emotions associated with work.

    It seems that it is impossible to quantify brain activity, but modern advances in the field of neurotechnology allow this to be done with the help of technical means. Thanks to them, teachings such as labor cost theory can become fully functional.

    Conclusion


    In the short term, current approaches to company accounting are unlikely to change. But some countries are beginning to recognize the value of intangible assets as part of reporting. For example, China is gradually moving from capital-intensive industries to technology and services.

    As a result, new installations are introduced that allow fixing external factors related to intangible assets. This provides clarity, but does not create the reliable pricing system that the current business environment requires. Can the next long business cycle provide what is required?

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