{"id":1709,"date":"2019-05-21T02:39:57","date_gmt":"2019-05-21T02:39:57","guid":{"rendered":"http:\/\/kusuaks7\/?p=1314"},"modified":"2023-07-18T09:25:12","modified_gmt":"2023-07-18T09:25:12","slug":"one-key-metric-for-maximizing-your-market-value","status":"publish","type":"post","link":"https:\/\/www.experfy.com\/blog\/consumer-tech\/one-key-metric-for-maximizing-your-market-value\/","title":{"rendered":"One Key Metric For Maximizing Your Market Value"},"content":{"rendered":"

If you want to know what the market really thinks about a company, there\u2019s one pretty simple way to tell: just look at its price to sales ratio. This one little number encapsulates performance, value, and trajectory, and it\u2019s a lot harder to manipulate than price to earning ratio, which, although popular, is less reliable given the variable treatment of many intangible assets which can be either expensed or capitalized in different circumstances.<\/p>\n

This ratio can be explained simply as how much the market pays per $1 of revenue. For example, Ford\u2019s price to sales ratio is currently sitting at about $0.21, meaning that for every dollar of revenue Ford generates, the market pays only twenty-one cents\u2014showing how little they value the customer dollar compared to their own dollars. This is not an impressive number, particularly compared to Alphabet, which earns about $5.77 per every dollar of revenue. Now, some might say that it\u2019s an unfair comparison\u2014that price to sales ratio varies a lot from industry to industry and that it shouldn\u2019t be used to compare companies in such different markets.<\/p>\n

Our response is \u201cnot anymore.\u201d Industry designations are already outdated\u2014just look at\u00a0S&P contorting itself<\/a>\u00a0to update its Global Industry Classification Standard (GICS) for the twenty-first century market leaders. S&P moved companies like Facebook, Apple and PayPal from the technology sector into the communication services sector where they will join companies like Verizon and CenturyLink\u2014as if that makes for a better fit? Those companies that are hitting the big market values straddle multiple industries and often add new industries to their portfolio at surprising pace. Just consider Alphabet\u2019s self-driving car subsidiary, Waymo, which touches the transportation industry just like Ford, but creates a great deal more market value in its operations and focus.<\/p>\n

So if industry isn\u2019t the final word on market value and the all-important price to sales, ratio, what is? The answer is business model. Regardless of industry, companies all over the world are shifting to new business models based on technology and platforms, rather than the products and services of the industrial age\u2014and those that make this shift and leap the digital divide are rewarded with dramatically higher market valuations and corresponding price-to-sales ratios.<\/p>\n

In our analysis of public companies over the last ten years we have seen the emergence of four different business model groups, and found that each group on average has different price-to-sales ratios:<\/p>\n

    \n
  1. Physical capital companies, those that make and sell tangible assets, have the lowest price-to-revenue ratios, often at or under 1x.<\/li>\n
  2. Human capital companies, those that offer the services of people, have slightly higher, but still unimpressive price-to-revenue ratios, often from 1x \u2013 2x.<\/li>\n
  3. Intellectual capital companies, those that use scalable IP to create products like software or biotechnology, have higher price to revenue ratios, usually in the 4x \u2013 6x range.<\/li>\n
  4. Network capital companies, those that use platforms to connect networks, have the highest price to revenue ratios, often as high as 8x or higher.<\/li>\n<\/ol>\n

    Naturally there are some industries that have a bias towards one business model or another, but the industries are converging quickly. Amazon is a retailer, and thus deep in the physical capital space, but they have complemented this business model with a suite of efforts in the technology and platform space with components like Amazon Web Services, Alexa, and their seller marketplace. This business model advantage means that while Walmart has a price-to-sales ratio of 0.55x, Amazon, a competitor, has a ratio of 3.7x. What does this advantage mean? It means that the market sees that the assets Amazon owns and is developing have more value today and in the future than those of Wal-Mart. This advantage also gives Amazon better access to capital and more financing options.<\/p>\n

    We can see the same comparison if we look at Tesla and Ford. Although they are both manufacturing cars, Tesla is making big investments in the creation of new intellectual property and high-tech, scalable manufacturing. Thus, although they share an industry, Tesla has a major market capitalization advantage and a price-to-sales ratio of 2.9x, compared to Ford\u2019s paltry 0.21x.<\/p>\n

    The connection between business model and market value is an essential one for corporate leaders to understand. Industry can no longer be an excuse for poor market values because the assets that driver higher valuations, technology and networks, are accessible no matter what your starting point. The challenge that most leaders have is that shifting your investment patterns into new types of assets, such as software and networks, requires boldness and an ability to shift mindset that many leaders, who grew up with an industry focus, struggle to achieve.<\/p>\n

    At a high level, the path to growth is clear:<\/p>\n

      \n
    1. Pinpoint your starting point\u2014 what is your business model<\/li>\n
    2. Inventory your intangible assets \u2013 data, networks and technologies<\/li>\n
    3. Validate \u2013 your new approach to building a modern business model<\/li>\n
    4. Organize \u2013 a small, passionate team to get going<\/li>\n
    5. Track \u2013 your new business model transformation<\/li>\n<\/ol>\n

      But of course, the devil is in the details. At each step, corporate leaders will need to source and develop new skill sets, fight against institutional biases and be willing to get some things wrong in the pursuit of new avenues of growth.<\/p>\n

      We all know that there is a natural rise and fall in the world of business. Today\u2019s leaders have to jump the curve if they want to be tomorrow\u2019s leaders as well, and doing so requires creating new business models to compete and earn the market\u2019s regard and dollars.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Regardless of industry, companies all over the world are shifting to new business models based on technology and platforms, rather than the products and services of the industrial age—and those that make this shift and leap the digital divide are rewarded with dramatically higher market valuations and corresponding price-to-sales ratios. If you want to know what the market really thinks about a company, there’s one pretty simple way to tell: just look at its price to sales ratio. This one little number encapsulates performance, value, and trajectory, and it’s a lot harder to manipulate than price to earnings ratio.<\/p>\n","protected":false},"author":69,"featured_media":8359,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[196],"tags":[96],"ppma_author":[1627],"class_list":["post-1709","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-consumer-tech","tag-marketing"],"authors":[{"term_id":1627,"user_id":69,"is_guest":0,"slug":"barry-libert","display_name":"Barry Libert","avatar_url":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g","user_url":"","last_name":"Libert","first_name":"Barry","job_title":"","description":"Barry Libert is the co-founder of AIMatters, an AI startup serving the C-Suite with the first AI powered strategy platform.  He serves on a number of boards and advises CEO of startups and large enterprises on becoming AI-first companies. He also co-wrote The Network Imperative: How to Survive and Grow in the Age of Digital Business Models published by HBR. "}],"_links":{"self":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/1709","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/users\/69"}],"replies":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/comments?post=1709"}],"version-history":[{"count":4,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/1709\/revisions"}],"predecessor-version":[{"id":29305,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/posts\/1709\/revisions\/29305"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/media\/8359"}],"wp:attachment":[{"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/media?parent=1709"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/categories?post=1709"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/tags?post=1709"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.experfy.com\/blog\/wp-json\/wp\/v2\/ppma_author?post=1709"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}