February 7, 2014
The devaluation of tech companies like LinkedIn and Twitter is unmanageable over the long-term. Wall Street will have to determine new ways to value social tech firms that is sustainable. To judge based on connections and the enrolled i.e active end users may not support long-term success.
“This is one of the key differences between the way LinkedIn, Twitter (TWTR +6.17%) and Facebook (FB +3.43%) report earnings. While Twitter and Facebook heavily promote their MAUs (monthly active users), LinkedIn has chosen to generically list the overall number of signups without providing any further details,” reports MSN Money.
The valuation of companies expecting increased members is unsustainable as companies have to reach a point of diminishing returns where the access to more members or active users is not possible based on the available population. There will have to be an increase in population and faster aging members to sustain an ever increasing capture rate at the age for legal enrollment. This complexity is exacerbated by the digital divide that are available and age relevant targets for capture.
“The law of diminishing returns or principle of diminishing marginal productivity , economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.”
Wall Street take a page out tech and consider innovating the parameters in which technology is valued. Valuation cannot continue to be all about growth but more so on how sustainable companies are in which active users are sustained over time.