IT Sector Moving From Valuation to Value

Analysis

Photo by Exadel

Eyal Zucker, CEO of Exadel HU, thinks that the IT industry is approaching a new era, with an emphasis on actual revenue growth, profitability, and customer satisfaction, rather than growth in the tech sector.

In the last six months, many tech companies have announced significant layoffs. A few examples from the world of tech giants are the following: in the fourth quarter of 2022, Meta laid off 10% of its employees (11,000 workers), while Twitter as much as 50% (3,700 workers). These downsizings signal the beginning of a new era and a major shift in perception, according to the head of Exadel's Budapest center.

The present halt took place at the end of a decade when investors valued tech companies based on their potential for growth, regardless of their real performance. The low interest rate environment and an influx of funds saw an unprecedented surge in fundraising. As a result, a large number of new companies have been invested in, with all investors waiting for “the next big thing”.

Was 2022 the Year of Hangover?

“The above-detailed flow led to sky-high valuations for many tech companies, causing a valuation bubble, with an emphasis on pursuing growth rather than real profitability. The era of valuation, however, ended in 2022, a sort of ‘hangover year’ for the industry, that brought along an inevitable shift in perception as well," explains Eyal Zucker.

He thinks tech companies in the next few years will be valued based on their ability to deliver real results to their customers and investors. This shift has been driven by multiple factors, such as the changing macroeconomic environment of rising rates, and thus the changes in the ways investors calculate their returns in correlation to risk portfolios. Eyal Zucker calls this the shift from the era of valuation to the era of value.

The CEO of Exadel HU adds, "We are entering a unique period. It appears that there is a lack of money, but at the same time, funds are abundant. Simultaneously, though, there is a shortage of viable companies with solid business models to invest in. Companies have to prove their ability to deliver real results. Instead of growth, they will have to focus on key metrics such as revenue growth, profitability, and customer satisfaction."

Zucker believes that the transition will be painful for some. While many companies keep downsizing, funds and the workforce will gravitate towards those with a solid business model and strong balance sheets. Those that can adapt and focus on delivering value will be well-positioned for success in the coming years, according to the CEO.

Transition is Natural and Necessary

Despite all hardships, the transition from the valuation era to the value era could prove to be a positive development for the tech industry. Companies will focus more on delivering value to customers and stakeholders. The global software engineering company Exadel, for example, opened a new office in Budapest in 2022 and has since been expanding.

The CEO of Exadel HU concludes, "Crises often bring about a sorting out of the strong and the weak, with the strong surviving and the weak disappearing. The past few years have been characterized by an irrational amount of money being poured into companies, leading to a distorted perception of value. Many companies that are currently trading at a fraction of their previous value are now realizing this. Entrepreneurs who have only known growth since the 2008 crisis may have held the belief that shares, money, and market value would continually increase. However, this perspective is shifting."

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