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Knowing how to value digital tech companies is critical to value investing

Tong Kooi Ong and Asia Analytica
Tong Kooi Ong and Asia Analytica11/11/2021 9:10 AM GMT+08  • 8 min read
Knowing how to value digital tech companies is critical to value investing
Tech companies are synonymous with innovation.
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Not all tech companies are created equal. Some are hugely successful, others less so and yet many more fall by the wayside. The most successful are those that use technology to create new value in business models and customer experience.

Alibaba Group Holding, Facebook and Google are among the world’s most valuable companies today. Their platforms have the key defining characteristics of digital tech — network effect, where each new user adds value for all existing users; and declining marginal costs, which is where the platform costs can be spread out over each additional user. Over time, these characteristics create huge barriers to new entrants, thereby allowing pricing power with near monopolistic outcomes.

On the other hand, Apple started out as a (mostly) hardware company — designing and selling computers, tablets and smartphones. What makes it one of the great tech companies today is the foresight of Steve Jobs, not just in innovative products but also building and maintaining tight control over the entire Apple ecosystem. That now gives the company significant leverage in the digital business, in terms of the new subscription-based services that it can keep adding to its repertoire, which currently includes payments, news-entertainment content, cloud storage, healthcare and fitness apps.

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