How to analyse tech companies | Internet based companies - YouTube

Hello friends, welcome to another episode of me, Shashank Udupa.

In this video, we will talk about- How you can analyze internet companies? What are internet companies?

We have seen recently that there are so many companies coming up with an IPO.

Zomato, Paytm, Policy Bazaar, and other internet and new-age companies are coming up with IPO.

In the market, we see two distinct camps. One is the old-school value-oriented investors.

What they are saying? There’s no profit in this business, it’s a loss-making business.

They keep putting money in the company, getting more people, and keep doing losses. There’s no value in the business, no EPS, no profit growth.

So how can we invest in such businesses?

There’s another camp who are set of people saying that it’s a new age business, this is how you do it, this is the future of how business run.

Not buying today, FOMOs are being created that if you dont buy today then you will miss out tomorrow.

Before I start this video, you dont have to be in either camp. We are going to be logical and unbiased.

We won’t be like we want to profit out of this, we are going to be unbiased. We will look at a logical and knowledgeable perspective.

What is the difference and why is it happening and why is it happening right now?

I am also going to talk about what are the advantages and why are they doing this?

We are going to do all of that. In this video, I will cover- Why are so many tech IPOs happening?

How are these new tech businesses different from leading traditional businesses?

How are Network Effects & Big Data playing a big game? What is the optionality for these new-age businesses?

Why are they able to do this which they couldn’t do before? We will cover all of these.

In 2021, we may see almost $40 billion being pumped into the Indian private company business.

The global capital is slowly coming into India as well.

If this trend keeps going on then a lot of unicorn IPOs coming and most of them might issue fresh capital, not for secondary sale but primary.

Now let’s get to all the points one by one.

The first is, Why are so many tech IPOs happening? Why are they happening right now?

First, you need to understand what is an IPO.

IPO is a tool that helps demand meet supply or supply meet demand.

We have done a lot of episodes and videos on IPO as well. You can have a look at them on the Groww channel.

The IPOs of Indian hi-tech companies like Zomato, Paytm, Policy Bazaar are happening now as they have gained acceptance in our everyday life.

It’s for a lot of people, you and me.

If I want to order food, where will I order it? Either it’s Zomato or Swiggy, there’s no one else.

If I want to make payments, it will be through Paytm, Phonepe, or Google pay.

If I want to go from one place to another, I will use either Ola or Uber.

This list goes on as we are limited with 2-3 options. Everything is done via these new-age companies.

It makes sense for these companies to tap the IPO market as the audience is ready. Earlier it was not as most of them were value investors.

Now everyone is using technology and these companies are coming in and saying- I am coming up with IPO.

They already have a product or service that is being used and are making revenue. These are hi-tech businesses and revenue businesses as well.

But some people are not profitable and some have reached profitability.

The problem here is are these companies are getting listed at an attractive valuation or not is a very tough question to answer.

How do you define the old metric that we follow? How do you define whether a new-age internet company is attractive or not?

If you look at profitability, they might not have it.

So today we can’t say anything but future when we connect back the dots looking backward.

Another reason why we are seeing so many tech IPOs is that SEBI has relaxed some of the restrictions for IPOs.

SEBI created an alternative listing platform called Innovators Growth Platform for new-age entrepreneurial ventures in 2019.

They have reduced many rules so all of these new technologies coming in and restrictions are lifted from SEBI so that we can boost IPOs for new-age business.

The next point is: How are these new tech businesses are different from the traditional businesses?

This is a very interesting thing.

Assume you are a traditional business, how will it work? You put in your capital, own money in business, or take some loan.

I will invest in a plant, office, or building. Will hire team members. I will manufacture products or provide services for profit.

I will make a profit from Service and pay the loan. Finally, I will gain profit become happy.

Keep earning for years and invest rest in building higher capacity. This is a very normal process.

This is how old-age traditional companies work.

Now, look at how do startups work. A startup works on a hi-tech high-growth business idea.

He puts in small equity and starts a pilot project. It’s a small amount and no loan is required.

He pitches it to angel investors or family offices or people who want to invest. He asks for seed funding. He gets seed funding.

This is seed funding and not debt, he is giving equity of his company or part of it.

Taking this money, he will hire people, build infrastructure, strengthen the core tech, build the brand, grow fast & gain market share.

He will gain another round of money and give a bit of equity, again the process repeats, hire people, strengthen the core tech & gain market share.

Now you know the difference between traditional where profit is king whereas in this business profit is not king.

It’s about growth and gaining market share.

It is because the first person to capture the business market share, grow fast, and reaches a point of profitability is the winner.

Now let’s look at why is this happening from Network Effects & Big Data.

In simple words, any business where an increased number of customers/subscribers improves the value of goods/services is a business that benefits from network effects.

If I am using a particular company or product or service, I might recommend others for it.

It’s a network effect where I am saying few people, and they tell more than 5 people. That’s how everything gets ballooned out.

Take the example of Facebook. Starting from one college, it kept on adding new users year on year.

Then so many people came on Facebook.

Many new IT startups are doing the same thing. Be it Zomato, Paytm, Ola, Uber, and so forth. They all have the same logic.

They have lot of users on their app, the higher the value of the co. becomes as more users mean more transactions that leads to more revenue-generating opportunities.

If currently I am not charging anything but I can see attraction towards the company, a lot of users are coming on the platform.

Eventually, I may start charging. This doesn’t happen in a traditional business.

If a cement co., for example, if I sell a bag of cement to someone, I have to first make the cement, put the cost for it, and then sell it to someone.

If I sell 20% more bags compared to the last year, it doesn’t change significantly as growth is 10-15-30-40%.

While in startups you can see 100% growth month on month.

Big data comes in, it means a large volume of data – both structured and unstructured.

In structured you know what to do with the data and in unstructured you dont know.

This impacts business on day to day basis.

Big data can be analyzed for insights that lead to better decisions and strategic business moves.

Let’s understand with an example. Zomato has roughly 7 million users across 500+ cities around the country.

The biggest advantage it has with its app is that it gets to know the consumer behavior of each part of the country.

For eg, if a particular type of biryani being regularly ordered from a particular area in a city at a particular time gives so many options to Zomato.

Maybe in Pune around 11:30, from this college, a lot of people order a particular biryani from a restaurant, Zomato has that data.

If they want to take advantage of that, they can do something from it.

The more data they get to analyze and offer better deals to the customers.

Maybe they can give discounts so that more come in. All of this can move in favor of the company because of big data.

If you look at big data, a traditional cement business can’t do it.

Traditional cement business is just demand and supply, there’s no big data here. They have little data.

Even though revenues may increase over time, but Zomato and traditional internet businesses dont make revenue in the early days.

They focus mainly on distribution.

What is the optionality for these new-age businesses? How is this happening? Why can’t traditional businesses do it? What is happening?

Optionality is a very powerful business model for hi-tech startups.

Optionality in a business means having the right to do something new from what you are doing currently if it makes economic sense.

Optionality is not something that any business can have. You can have the best product, you can have the best IT, best content.

But if you dont have people using your platform, then it’s a big issue.

Once you own the distribution, you have so many options to serve your customers.

Amazon started only with books in the late 90s and then quickly ventured into almost any other business category.

We saw switch optionality from one business to another very fast. Internet companies have the advantage of shifting options or rights.

From all of these, hope you got a beautiful understanding of how internet companies are/might make money or how they operate.

Either by raising money, putting it into the business, building distribution and then making money.

Remember in the old days, there was ola/uber, other Taxi-hailing companies, many food delivery companies.

In the end when the dust settled, after so many years only 2 are left in both segments.

With these 2 people, the market is so big that they eventually end up making money from all the customers.

This is how we analyze different companies. This is for the long term and not the short term.

If you liked this video, then like it and share it, and also subscribe.

Hope you understood a lot from this video. This is me, Shashank Udupa, signing off.