Thursday, June 8, 2017

What is a "Technology" Company from an Investment Perspective

       When most people are asked what a technology company is, they think of computers, software or bioscience - companies with a lot of PhDs doing complicated things.  But that definition applies to companies not that are not commonly thought of as "technology" like those involved in oil fracking.  From an investment standpoint, I argue that a technology company is defined by two characteristics: miniscule marginal costs and network effects.  Facebook is a perfect example in both respects.  With regard to marignal costs, what does it cost them to add one member or one advertiser?  With regard to network effects, people want to be on Facebook because other people they know are there.  These two characteristics are so important from an investment standpoint because they allow for rapid and massive scaling at remarkably little costs.  Hence, the massive market capitalization of successful technology companies.

        Notice by this definition, Tesla is not a technology company.  That is primary reason why I have such a hard time explaining its valuation.

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