On February 13, 2018, the New York Times reported that Uber is planning an IPO. Uber’s value is estimated between $48 and $70 billion, despite reporting losses over the last two years. Twitter reported a loss of $79 million before its IPO, yet it commanded a valuation of $24 billion on its IPO date in 2013. For the next four years, it continued to report losses. Similarly, Microsoft paid $26 billion for loss-making LinkedIn in 2016, and Facebook paid $19 billion for WhatsApp in 2014 when it had no revenues or profits. In contrast, industrial giant GE’s stock price has declined by 44% over the last year, as news emerged about its first losses in last 50 years.
Why Financial Statements Don’t Work for Digital Companies
Traditional accounting can’t explain how companies like Uber and Twitter are valued.
February 26, 2018
steven moore for hbr
Summary.
Why do investors react negatively to financial statement losses for an industrial firm but disregard such losses for a digital firm? One reason is that our current financial accounting model cannot capture the principle value creator for digital companies: increasing return to scale on intangible investments. This becomes clear when you look at a company’s two most important financial statements: the balance sheet and the income statement. For an industrial company dealing with physical assets and goods, the balance sheet presents a reasonable picture of productive assets and the income statement provides a reasonable approximation of expenses required to create shareholder value. But these statements have little salience for a digital company, which often has assets that are intangible in nature and appreciate in value with use, and ecosystems that extend beyond the company’s boundaries. So as digital companies become more prominent in the economy, and physical companies become more digital in their operations, they will also have to dramatically alter the manner and ways by which they convey their value to outside investors.