Company valuation method is outdated

After the publication of the report for the first quarter of the work of Alphabet with a profit 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 on this indicator, which analysts could not 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 still managed to regain the title of the most expensive company.

Such a capitalization of Alphabet looks even more absurd considering the economy of companies - in 2015 Apple's profit amounted to $ 234 billion, and the profit of the oil giant Exxon Mobile was more than $ 300 billion. Alphabet's income of $ 74.5 billion looks insignificant. But it’s impossible to call Alphabet overvalued due to low profits - Amazon is on the market and demonstrates a similar situation. With a margin of 3%, according to all the laws of the market, it cannot have a similar capitalization. So how do these companies do this?
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Outdated evaluation approach

All this shows how current financial models are outdated. With the existing approach, they can simply stop using. At the core of the existing capitalization pricing system is a discount based on a conglomerate estimate. If the company has several directions, then they are summarized according to the principle of a conglomerate and are valued by the stock market at a significant discount. This method of evaluation became especially popular in 1970, when private capital was in demand. Large and slow-moving companies were actively splitting up and they were replaced by young, ambitious and ready for changes, which were backed by private investors.

During the time of takeovers, the takeovers of companies from investors formed the opinion that a difficult business always loses. As a result, investors began to give preference to simple companies that are easy to classify. Exceptions? You can take the same General Electric, which does not suffer in the evaluation of shares.

Simplicity is not always good

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

Some analysts continue to argue at the relatively low assessed value of the Alphabet as compared to the possible capitalization of pure Google. But they do not take into account the company's economy, as a complex structure with large investments in innovative areas. In the long run, these investments can have a significant impact on the entire IT industry as a whole, and on other areas as well. Therefore, all tools for evaluating such companies are similarly outdated.

Analysts can easily evaluate the 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 recommendations services according to the old analyst scheme?

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