A standard criteria for listing on the Nigeria Stock Exchange (NSE) is that a company must have cumulative pre-tax profits from continuing operations of not less than N300 million over the last 3 years, with at least N100 million pre-tax profits in two of these years. This is just not feasible, especially for small tech startups.
Healthcare and information and communication technology (ICT) sectors, particularly financial technology (Fintech), top the considerations of investors looking to invest in Nigeria, analysts who spoke with BusinessDay, have revealed.
The ICT sector on the Nigeria bourse is represented by seven companies with market performance, measured by capitalization putting the sector at number seven (N32.06 billion) out of the eleven sectors the bourse is categorized into. Together they are worth N24.87 trillion in market capitalization, according to NSE first quarter fact sheet 2018.
Globally, Amazon’s profitless business model is a good example. The company is organized not just in segments, but in dozens and dozens of separate teams, each with its own internal workings and a high degree of autonomy.
Some are relatively old, and well established, and growing slower, and are profitable. Others are new startups building their business and losing money as they do so, like any other new business.
Amazon is very careful indeed to make sure that there’s no great chunk of profits at the end of a quarter. Instead, there’s an insistence that money that is made in one of those mature areas, must be spent on one of those start up areas. In that manner, there’s no profit to be taxed away.
The tech industry is rife with high-potential targets that can be snapped up for a breathtaking price tag. The higher price tag makes it necessary for tech firms to hoard cash
Snapchat, for example, is worth a whopping $34 billion despite making no money at all.
“Tech companies tend to follow an aggressive growth strategy. If you want to expand the business and push out all the competitors in a ‘winner-takes-all’ industry, you have to be willing to sustain losses for incredibly long time,” says Mark Lee.
Another big issue is the payment of dividend. Benjamin Graham, an American investor, an economist, once said that two-thirds to three-fourths of earnings should be paid out by a company in dividends. It was seen as the only way for investors to get the value they deserved for their patience.
Dividend-paying stocks have come to make a lot of sense in Nigeria given the near cultural-belief that making returns on investment is the essence of engaging in any investment or business plan.
According to Inc. the five most valuable companies in the world are Amazon, Apple, Google, Samsung and Face book. Of these highly profitable companies with market capitalization standing as at 14th of May at $777.11 billion, $924.78 billion, $ 764.14 billion, $283.1 billion and $540.25 billion respectively, only two of them actually paid dividend in 2017 Microsoft and Apple.
Leading tech companies in Nigeria today cannot be said to be – given the peculiarity of the market they operate in – competitive on a global scale. Regulatory bottlenecks are suffocating them out of business and stunting their growth.
“As society looks at us and tries to benchmark us with peers, this is one of the areas that worries. What drives innovation are Research and development (R&D),” Temi Popoola, managing director and CEO of Renaissance Capital Nigeria told BusinessDay. “If you picked up an average corporate company in Nigeria today and ask “how much do you spend on Research and Development,” you will find out that in some companies, it is not in their line item at all. If that is the case, you wonder how we intend to drive innovation. There is a broad part to this innovation.”
