Prior to the internet revolution, companies were often valued based on their tangible assets. An energy company could receive a multiple based on their oil and gas reserves, or a manufacturer based on the value of their machinery. That’s because these physical assets were key to value creation: an energy company made its money extracting its oil reserves from the earth and selling it for more than it costs.
With widespread internet connectivity we now live in a digital world where many of the world’s leading companies derive their value from virtual assets, namely data. High tech firms like those in social media, search, e-commerce, artificial intelligence, and cloud computing are in the business of monetizing proprietary data by selling hyper-targeted advertisements, recommending a new hit song or TV show, or anticipating our need to stock up on housewares.
Unlike tangible assets, data is a quasi-infinite, non-linear growing asset. The world produces 2.5 quintillion bytes of data daily, but that figure should grow at an accelerating rate as more people and devices are connected to the internet.1 As data collection continues to surge and new techniques to monetize data arise, we believe it will become an increasingly valuable asset. Therefore, investors should consider analytical frameworks to better evaluate companies’ data in order better understand their intrinsic value and potential for growth.
Why Data Should Be Considered an Asset?
Infonomics or datanomics treat digital information as a legitimate economic asset because an asset is defined as something that has economic value with the potential to provide its owner future benefit. Social media companies, for example, collect user data like age, gender, and location because it allows them to charge a higher price for their advertisements when they can be more specifically targeted to likely consumers. Of course, many tech firms have much more vast and comprehensive data on their users, creating virtually endless possibilities to extract economic value from this information.
One key argument in favor of treating data as an asset is that companies have made significant investments in collecting, storing, and using their data. It is projected that total spending on big data and analytics could reach $274 billion by 2022.2 Accounting rules, however, do not treat data as an asset. Therefore, costs associated with storing and maintaining data is treated as expenses rather than capital investments, which depresses earnings and impact ratios like price-to-earnings (P/E).
But if data were treated as an asset in accounting rules, certain valuations would likely adjust. For example, high tech companies tend to trade at high multiples based on asset-based metrics like price-to-book (P/B) ratios. However, all things equal, treating data as an asset on a firm’s balance sheet would increase a company’s book value and reduce the P/B multiple for many high-tech organizations. Further, by more accurately accounting for data, investors would have greater transparency into a very key ingredient in a firm’s ability to generate revenue.
What’s Data Worth?
The top five companies in the S&P 500 index – Apple, Alphabet, Microsoft, Amazon, and Facebook – are all data-rich tech firms and together represent approximately 26% of the index, implying that data is indeed very valuable.3 While each firm dominates different aspects of the tech world, they share a commonality in being among the world’s largest collectors and users of data, leveraging this resource in numerous ways to either directly monetize users or to indirectly generate revenue by enhancing their product offerings. Yet specifically valuing their data presents a challenge, not just because it isn’t reported as an asset in financial statements, but because the companies also closely protect what data they have and how they use it. And not all data has the same value. Customer information, product status, company sales, or social media engagements, can range in value, while additional factors can further impact the analysis, like quality, accuracy, timeliness and size.
1. TechJury, “How Much Data Is Created Every Day in 2020?,” Sep 10, 2020.
2. IDC, “IDC Forecasts Revenues for Big Data and Business Analytics Solutions Will Reach $189.1 Billion This Year with Double-Digit Annual Growth Through 2022,” Apr 4, 2019.
3. Note: Data sourced from FactSet as of 11/13/2020.
Originally Posted on November 20, 2020 – The Value of Data in a Digital World
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