The tech sector has a valuation higher than the US' GDP! Innovation and perception building drive the surge

From smartphones and digital payments to electric cars and AI, almost every individual is surrounded by technology and captivated by innovations in the tech sector, evolving at an unprecedented pace. Basic banking apps have now been reached by sophisticated fintech apps, that offer diverse services ranging from investment to insurance and beyond. Technology has surged as an essential part of human life especially after digital payments, online shopping, telehealth and remote working software allowed the world to pull through a pandemic.

Even when tech companies were taking in bids which were 10 times the sale back in the early 2000s, had anyone imagined that eBay was just a predecessor to Amazon, which will evolve from an online book selling venture, into the world's biggest tech conglomerate. The company now has a valuation of more than a trillion dollars, and is leading the pack of big tech companies in the US and globally. Another big tech firm Apple had been left out in the cold by the 90s, but then its fortunes turned around and surged after the iPod followed by the iPhone triggered a tech revolution, and it's now valued at around $3 trillion and stock prices have shot up by 5800% since the first iPhone was launched.

In the smartphone market, the market share of Samsung is higher than that of Apple, yet it's far from what the force behind iPhone has achieved. Samsung electronics made $244 billion in sales for 2021, as compared to Apple's $365 billion, driven by an added demand for smartwatches, airpods and accessories that grows with sales of its flagship device. Despite this $100 billion disparity in sales, Apple's valuation at $3 trillion is almost 10 times Samung's market cap of $310 billion.

This difference has more to do with how a company is perceived, and Apple has built a reputation of consistently swaying consumers its way with innovation, year after year. Even in the post-Steve Jobs era when competitors including Samsung and Huawei are catching up with innovative devices, Apple's allure as a pioneer remains unchanged thanks to a legacy of inventions left by him. Like most industries, even for tech, market sentiment about a company is driven by effective marketing and a narrative. Which is why Facebook, that started as a platform to socialise by Mark Zuckerberg when he was still a student at Harvard, is today the startup success story that inspires tech entrepreneur in the US and beyond, which has helped it reach a market value of over $500 billion. So branding and the promise of growth, is what keeps pushing tech stocks upwards, but it needs to be reiterated with a consistent uptick in sales as well as expansion in terms of product portfolio or services, so that a firm stays relevant and stocks stay in demand. This is reflected from Tesla's dream run since its IPO in 2010, which was followed by its valuation surging by more than 4000% in a decade to cross $898 billion now, as Elon Musk has established the reputation of a visionary techpreneur who can also sway crypto prices with a single tweet. From Gates' geek turned billionaire story to Musk's patience with electric cars as well as ambition to colonise Mars, a founder is also a key driving force behind valuations of tech firms.

These along with constant innovation which is presented to the shareholders in the correct manner as well as potential for further accelerated growth following tech adoption in the past couple of years, have helped the tech sectors valuation surpass the US GDP, by crossing $30 trillion. Apart from determining share prices, accurate valuation is also essential for mergers and acquisitions, which helped Facebook make the right decision to spend a billion on Instagram and then $19 billion on WhatsApp, both of which paid off.

So how are valuations in the tech sector decided apart from the generic variables such as growth prospects, EBITDA, sales and business plans?

One factor that analysts and investors need to focus on is the spending in research and development. Constant innovation is the key in a fast changing market where Apple becomes a smartphone giant from making iPods while leading phonemaker Nokia becomes history in just one decade.

Another variable to be kept in mind is the subsector within tech that a company operates in.

For instance now that Tesla has opened up the electric vehicle market, AI-driven automobiles are the future. Data is gold in the digital ecosystem, making Meta and Google dependable stocks with a stable growth trajectory. Cloud-based services will also be a non-negotiable need for businesses, which means the sector is destined for growth. The way the semiconductor shortage has affected the world, has established companies manufacturing microchips as firms with high growth potential.

Speaking of this, government regulations on tech also play a major role in determining valuations of major tech companies. Data localisation rules or privacy norms, and the level of compliance in the sector, influences how the market sentiment around companies in the big data subsector will. At the same time regulations on lithium mining can impact prices and eventually the revenues of electric vehicle makers globally.

Market value in the tech sector also depends on the way a company handles data. A firm which seems to fail at securing consumer data, can lose market confidence and hence its valuation. These concerns also drive up the value of cybersecurity firms, which are expected to bring in significant revenues for the foreseeable future.

As the world moves towards a sustainable future, renewable energy companies and AI which drives efficient use of resources will play a decisive role in the tech sector's valuation. At the same time smart tech in defence, mobility and day to day life, including self-driving cars and drones will gain increasing investor demand and valuation.