So far, artificial intelligence has been more a function for most firms than a direct revenue source. Nvidia and AMD are among firms that actually book revenue driven by processing needs for AI. Other firms now earn revenue from supplying AI enablement for software and information or communications products.
One common outcome of deregulation and technology change in any industry is that non-traditional competitors will enter markets. That is why “new” contestants from “outside” the legacy industry always will appear.
So Netflix and other video streaming firms emerge as competitors to linear video providers. Amazon emerges to compete with Walmart and Target.
AI virtually certainly is going to allow new contestants to enter existing markets, just as much as it allows legacy competitors to craft new products, add more value or change their roles in existing ecosystems.
But existing and legacy providers have done so in the past, sometimes because of deregulation; sometimes because of new technology. Cable TV companies entered the voice business, started serving business customers, became internet service providers, then mobile service providers. Some also became content owners and producers.
Most of those developments were based on deregulation. But technology also played a role, as cable operators were able to use optical fiber and processing technologies to create full communication networks from former "TV delivery" networks.
They also then became conglomerates in terms of their revenue contributors.
Conglomerates are hard to value, which is one reason financial analysts prefer “pure-play” assets. And more firms in the internet ecosystem seem likely to take on new and different roles in the ecosystem, with more-complicated revenue and valuation profiles. Alphabet, for example, seems generally valued in the same way as content or app firms, though it also earns revenue from products also sold by AT&T, mobile firms, ISPs and data centers.
As Amazon Web Services revenue is valued differently from Amazon e-commerce sales, so a growing range of firms have multi-product strategies that cross traditional industry lines.
Financial analysts often have coverage of “technology, media and telecom,” or TMT. Larger firms are able to specialize in each of the areas, as each of those segments have distinct business drivers, valuation metrics and roles in the internet ecosystem.
Consider the component companies in the S&P 500 “Communications” index. It includes firms as disparate as Activision Blizzard and Electronic Arts; Disney and Live Nation Entertainment; Comcast, AT&T and T-Mobile; Alphabet and Meta Platforms; Omnicom and Interpublic.
Nobody would argue they are all in the same segment of the internet business. Fox is a content producer and distributor, as is Take-Two Interactive. Live Nation is a concert producer.
Omnicom and Interpublic are advertising agencies. Match Group is a dating site while Verizon is a connectivity provider.
Nobody views all those firms as being in the same part of the ecosystem, or having comparable roles. At the moment, and with the caveat that the ratios shift over time, the price-earnings ratio of the index has relatively recently been about 18.
Looking only at relative differences in ratios, and not the absolute figures, the single index includes firms and industry segments with different ratios.
Ratios for mobile, ISP or telco firms averaged closer to 14.75. And the ratios within the sub-group vary as much as the overall ratio between segments of the index. Mobile assets might be valued differently from fixed network assets, for example, leading “diversified” firms with both types of assets to have a blended valuation.
At least relatively recently, AT&T might have a P/E ratio in the 11 range; Verizon possibly in the 14 range while T-Mobile is 16 or so. Comcast might have a 21 ratio while Charter carries a 24 ratio.
The ratios for non-telco firms were higher, at perhaps 22 or so. The advertising agency firms were individually valued between 19 and 22.
Application or content firms in the index had an average P/E of about 30, though very-high ratios of Netflix and Amazon do skew the average. Disney, Meta and Alphabet arguably represent the more-typical case, with P/E ratios in the 20 to 35 range.
Valuation always includes many elements, ranging from growth rates to firm size, perceived competition or moats, geography or existence of possible catalysts. More transitory issues, such as recessions, bank panics or new catalysts such as applied artificial intelligence (ChatGPT, generative AI, large language models) also have an impact.
The larger point is that once firms in the index begin to take on multiple roles, and once those roles produce significant revenue, valuation gets more complicated, since each role (segment) tends to have a different range of values.
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