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The new technology firms dominating financial markets were the companies that use the internet to deliver products and services.

What is the dark side of valuation?

In 1990, the ten largest firms, in terms of market capitalization, in the world were industrial and natural resource giants that had been in existence for much of the century. By January 2000, the two firms at the top of the list were Cisco and Microsoft, two technology firms that had barely registered a blip on the scale ten years prior. In fact, six of the ten largest firms, in terms of market capitalization, at the beginning of 2000 were technology firms and amazingly, four of the six had been in existence for 25 years or less. In an illustration of the speeding up of the life cycle, Microsoft, in existence only since 1977, was considered an old technology firm in 2000. The new technology firms dominating financial markets were the companies that use the internet to deliver products and services. The fact that these firms had little in revenues and large operating losses had not deterred investors from bidding up their stock prices and making them worth billions of dollars.

In the eyes of some, the high market valuations commanded by technology stocks, relative to other stocks, were the result of collective irrationality on the part of these investors and were not indicative of the underlying value of these firms. In the eyes of others, these valuations were reasonable indicators that the future belongs to these internet interlopers. In either case, traditional valuation models seemed ill suited for these firms that best represented the new economy.

What is a technology firm?

The line is increasingly blurred as more and more firms use technology to deliver their products and services. Thus, Wal-Mart has an online presence and General Motors is exploring creating a web site where customers can order cars, but Wal-Mart is considered a retail firm and General Motors an automobile manufacturing firm. Why, then, are Cisco and Oracle considered technology firms? There are two groups of firms that at least in popular terminology, technology firms. The first group includes firms like Cisco and Oracle that deliver technology-based or technology oriented products – hardware (computers, networking equipment) and software. You could also include high growth telecommunications firms such as Qualcomm in this group. The second group includes firms that use technology to deliver products or services that were delivered by more conventional means until a few years ago. Amazon.com is a retail firm that sells only online, leading to its categorization as a technology firm, while Barnes and Noble is considered a conventional retailer. This group is further broken up into firms that service the ultimate customers (like Amazon) and firms that service other businesses, often called B2B (Business to Business) firms. As the number of technology firms continues to expand at an exponential rate, you will undoubtedly see further subcategorization of these firms.

πŸ“… LAST UPDATED: 01/01/19 11:43:25 market capitalization revenue operating losses investors
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