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I am wondering if my reasoning is sound. I reason that, if a sector has a shortage in talent, the valuations of stocks/funds, in said sector, generally increases.

For example, if there was a shortage of cloud talent, but the demand for cloud services was expected to remain steady or increase at a steady rate, would one expect to see the price of stocks/funds increase?

I could also, however, reason that the higher cost for talent, in this scenario would drive down valuations?

Am I thinking about this scenario reasonably; If so, which line of thought is most inline with conventional thinking. Is my reasoning completely off base?

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    If a company has sufficient talent on hand, scarcity might hurt competitors more.... I don't think there's a simple direct relationship here.
    – keshlam
    Jan 18, 2017 at 3:50

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I suppose that scarcity of talented potential employees might be relevant to a rapid growth market/industry, but the effect is the opposite when human talents are being taken over by process technology. Talented metalworkers are rare because car panels are now made by machine tools or a material other than metal. In this scenario demand for metalworkers is on the decline, and over time there will be a scarcity of metalworkers as less people learn the trade. But demand for chemists or composite materials specialists or 3D modelers would be on the rise. There is less demand for human labor in general but more demand for computers and machines.

I'm not sure you can effectively come to an enterprise value adjustment based on the scarcity of potential employees. Businesses and sectors evolve.

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    Agreed, except ... :There is less demand for human labor in general ... however to produce / design machines you need human labor ... computers made quite a few jobs redundant, however the opened up tons of new jobs in other segments.
    – Dheer
    Jan 18, 2017 at 3:42
  • @Dheer Definitely, I suppose I should have expanded on that thought, my point was more on the word labor. There's less demand for actual blood sweat and tears labor. It doesn't take a team of people to hoist something because we have cranes; but it does take a different team of people to design, develop and manufacture the cranes (substitute whatever other technological advance advance you'd like).
    – quid
    Jan 18, 2017 at 4:35
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Supposition:

Scarcity in talent suggests a market where demand is outstripping supply. That's always a source for higher revenues.

On the other hand, you're right that salary competition for talent will reduce the profit resulting from higher revenues.

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In general terms, a lack of qualified, talented people will restrict a companies ability to grow since there simply will not be the necessary human resources available to successfully implement a high growth strategy.

This should have a negative impact on valuations since it would mean that the high growth expectations of investors and analysts cannot be met to satisfaction.

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