Company valuation method is outdated

After the publication of the report for the first quarter of Alphabet's operation with a profit index of $ 21.33 billion and a total income of $ 8.67 per share, the company's capitalization soared to $ 547.1 billion, taking a leading position in this indicator, which analysts could not help but pay attention to from VentureBeat . It is worth noting that previously Apple held the first place with a capitalization of $ 529.3 billion and subsequently it was still able to regain the title of the most expensive company.

This capitalization of Alphabet looks even more absurd, taking into account the economy of companies - in 2015, Apple's profit was $ 234 billion, and the profit of the oil giant Exxon Mobilemore than $ 300 billion. Against this backdrop, Alphabet revenue of $ 74.5 billion looks insignificant. But it will not work to call Alphabet overvalued due to low profits - Amazon is on the market, which demonstrates a similar situation. With a margin of 3%, according to all market laws, it cannot have such a capitalization. So how do such companies succeed?

Outdated assessment approach

All this shows how old financial models are out of date. With the existing approach, they can simply stop using. The existing capitalization assessment system is based on a discount based on conglomerate valuation. If a company has several directions, they are summed up according to the conglomerate principle and are valued by the stock market with a significant discount. This method of valuation became especially popular in 1970, when private capital was in demand. Large and clumsy companies were actively disintegrating, and they were replaced by young, ambitious and ready for changes, which private investors stood behind.

During the time of takeovers and company takeovers from investors, an opinion was formed that a complex business always loses. As a result, investors began to prefer simple companies that simply classified. Exceptions? You can take the same General Electric, which does not suffer in any way when evaluating stocks.

Simplicity is not always good

The idea of ​​simplifying the company has become obsolete. Now the market is ruled by Internet of things companies, big data, startups that are agents for providing services to customers, and technology companies. And soon, companies developing artificial intelligence or robots will also be included in this list. Therefore, the concept of focusing on one problem for success in the market looks absolutely absurd in our time. Kodak had a narrow specialization, and where did it lead it? The same Amazon - the company began with the distribution of goods, and now develops applications, sells e-books and many other products.

Some analysts continue to argue at a relatively low appraised value for Alphabet compared to the possible capitalization of pure Google. But they do not take into account the economy of the company as an integrated structure with large investments in innovative fields. In the distant future, these investments can have a significant impact on the entire IT industry as a whole, and on other areas as well. Therefore, all the tools for evaluating such companies likewise prove obsolete.

Analysts can easily evaluate material things in the form of sold devices or any other resources, as is the case with Exxon Mobile. But how to evaluate the algorithms of any of the search engines? How to evaluate the neural networks behind the recommendation services according to the old analytics scheme?

It seems that the time has come for radical changes that will happen very soon and the case with Alphabet only proves this.