Disruption in Business Model or Irrational Exuberance – Arthvigyan

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We hear tech companies gathering a lot of attention these days. When we see someone paying huge money to acquire stake in these loss making tech companies, it seems foolish to us. One may say that this is an irrational exuberance.

But all of this is just a mental talk unless we look at the real numbers.

Enough of a mental talk!

Let us dig the data deeper to get a real sense.

Airbnb vs. (Marriot + Hilton + Hyatt)

 

Doordash vs. (Yum Brand includes KFC, Pizza Hut, Taco Bell + Domino’s Pizza)

The number crunching has been worth the time.

Looking at these two instances above, one would understand to a certain extent logic behind high acquisition price.

Airbnb, a company founded in 2008, is fetching an annual revenue equivalent to age olds Marriot and Hyatt. What took Hyatt and Marriot 60 & 90 Years respectively, Airbnb has built in 12 years of its presence. Though it is loss making currently, it is well built to run ahead of these old giants.

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Doordarsh has been formed little later and has been in existence for 7 years now. It has been able to gather revenues equivalent to 25% of Dominos.

It is not to suggest that the valuations that are offered to these companies are justifiable or not. But the simple point is that, there is no irrational exuberance regarding sustainability of business model but a real growth in numbers that back these companies. These tech companies are coming with innovative business models to disrupt the businesses of age old companies or are creating their own niches in segments unexplored.

As an investor, it is hard to think on which business model will survive and emerge into a successful venture over a long period of time since the space is crowding up and it is immensely competitive. Also, legends like Warren Buffet have been skeptical about investing in tech companies as he says he doesn’t understand them. Definitely, identifying investment ideas in the space is difficult because as an investor one cannot invest in such companies with old models of finding out moats and valuing companies traditionally based on discounted cash flow. As many of these tech companies, do not have moat initially and is very competitive and that is why we see many tech giants burning cash today.

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Investors have to think differently to value these emerging business models. As can be seen from above, world is moving from tangible asset (Physical assets) to intangible asset (Asset light). Investors need to learn how to value intangible asset to participate in the growth of these business as there is always danger of paying excessive price in this euphoric environment.



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Vivek Chitale

Vivek Chitale

Life long learner | Passionate about investing in the stock market | Trying to bring differential insights
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