How fundamental analysis fails to evaluate digital assets?
For a long time, digital assets have caused controversy among investors, as they are not tied to actual fund flows like the conventional assets are. For this reason, it might appear that the value of digital assets is nothing but how market players evaluate them — a baseline speculation.
The origin of this conviction is quite clear. One of the key principles of modern finance introduced by Benjamin Graham and extended by Warren Buffet has been value investing. In such a paradigm, the fundamental value of digital resources does seem to be scarce.
However, what in general determines the value of digital media? No official standard seems to be introduced, thus, making it impossible to evaluate digital assets in particular.
Even the frontline digital media companies that seem successful at first glance may have numerous subtle drawbacks such as excessive censorship, non-market competition, data leakage and welfare threat arising from digital addiction. Thus, despite the commercial success of large tech companies the issue with identifying their intrinsic value remain open.
According to the classical Benjamin Graham and Warren Buffet model of fundamental valuation good fundamental value of an assets comes with low price and high cash flows. It is suggested that low asset price is a marker of poor distribution of publicly available information whereas high cash flows signal about significant consumer demand (or limited supply).
The matter of question is whether digital media complies with the fundamental valuation model. Let’s find out.
It is known, that the main value digital media produces is data. It may be assumed that data is only valuable when the access to it is limited. However, neither the fundamental valuation model nor the efficient market hypothesis draw the line between what is regarded as valuable data and what is not.
Some argue that the value of data is estimated by the readiness of market players to pay for it. In addition to price, the value of data is also determined by its practical applicability as valuable data allows for price coordination to happen in the market. However, as there is hardly any way to estimate how data is limited in supply, it is almost impossible to calculate the intrinsic value of data.
For instance, the major part of what tech giants (such as Facebook or Google) sell is a product of a consistent amount of unpaid communication of the platforms’ users. The quality of data produced does not really matter whereas its quantity does because it enables the platform to make money out of this communication. Thus, the users are incentivized to produce data of low value.
On the other hand, the platforms are strongly incentivized to adjust their technical decisions and platform policies to fit users’ needs. Therefore, the value of the digital assets of every tech company is determined by the specific tools it offers.
As Ronald Coase stated in “The Nature of the Firm” (1937) the price mechanism cannot coordinate price making by itself, as there is a cost to using it. It explains the existence of firms and their internal coordination that in some case may end up as a less costly one.
In the world of digital media, internal coordination is a bunch of people who are communicating and working together on a common goal. With better internal coordination, digital network does not have to depend on price mechanism to such an extent. This explains rapider digital network development and growth.
Internal coordination unveils another layer in the Benjamin Graham and Warren Buffet asset valuation model as it exists in an equilibrium relation with price coordination.
To sum up, for the digital assets it seems feasible to compete on internal coordination and objective values. This might give a rise to digital assets as a better economic system.