The shareholder perspective on “digital”

Having previously worked extensively with Maersk Line’s digital strategy, I have frequently been evaluating what value “digital” creates in an organisation. Last week Graham from Kontainers offered a perspective – the “shareholder’s perspective” – in this article…and thank you Graham for bringing it to my attention 😛 At business school I was taught that the value of a company is the discounted value of all its future cash flows. Simple. The only problem being the “future” part of the equation…and even more so for a start-up. So investors look at current revenue, profit, volume, number of customers and the like and apply a multiplier to get the “future effect”. The higher the perceived potential the higher the multiplier. In his post Graham looks at the valuation per container moved, very similar to “customer acquisition costs”. He takes Apex Maritime and Flexport and concludes that investors pay 19 times more per box Flexport is moving compared to Apex Maritime. A.P. Moller-Maersk’s current market cap is around USD 37 billion, which equates to somewhere around USD 1.500-1.750/TEU. This includes the assets and significant other activities (like Hamburg Süd)…but despite of these added benefits investors are still willing to pay 7-8 times more for a box moved by Flexport. In my book a large part of this is down to the difference in perceived scalability of the business models. For an asset owner, such as Maersk Line, there is a limit to scalability. Expansion as a minimum requires vessels and containers – and (probably) also people. If you are a “digital forwarder” on the other hand, the “digital” scaling is (almost) free of charge, so you can handle more volume without increasing your variable cost – not to mention what you can start doing with the data you generate (but that is another side to this coin). This being said, there is still a lot of manual work, which means expansion requires people even for the digital forwarders, and geographic expansion is more difficult and costly than people think it is. However, as a whole they are far more scalable than the industry incumbents, and probably only beaten by the more true data/software providers such as Xeneta or Kontainers. The investors show what they value by the price they are willing to pay, and clearly prefer the potential and scalability of the new players to having existing customer relationships, industry knowledge, a known brand – and physical assets. This has to get incumbents moving. Going “digital” is not just about fighting off new competitors, but equally about building a business model that is more scalable than the existing one. You don’t need to be fully digital in order to get benefits (as few players are), but moving in that direction should help to increase your multiplier in the process…