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The accounting of intangibles is a complete mess. For example – let’s say, there is a subscription business so let’s build a case around ET Money Genius. Now, we charge a sum of 3,000 rupees for a year’s subscription to Genius and let’s assume it costs our marketing team about 5,000 rupees to acquire a Genius subscriber. So on the face of it, this transaction is not profitable at least from an accounting point of view. But what if I told you that this Genius user is expected to stay with us for the next 10 years which will consequently give us 30,000 rupees in revenue. Which means what our accounting knowledge tags as a loss the very same transaction becomes a highly profitable one from an economic point of view.
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RESOURCES
Security Analysis by Benjamin Graham & David Dodd : https://amzn.to/3pFrEFEhttps://blog.validea.com/the-importance-of-intangible-assets/https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/getting-tangible-about-intangibles-the-future-of-growth-and-productivityhttps://www.sparklinecapital.com/post/investing-in-the-intangible-economyhttps://www.investorschronicle.co.uk/ideas/2022/03/01/stocks-with-an-intangible-edge/https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/
CHAPTERS
00:00 Introduction
02:02 INTANGIBLES- THE INVISIBLE, INVINCIBLE SUPERHEROES OF INVESTING
05:00 TRADITIONAL VALUATION METRICS LOSING ITS POWER IN AN INTANGIBLES WORLD
06:54 INTANGIBLE ASSETS ARE INCREASINGLY THE MAIN DRIVER OF VALUE CREATION
10:55 SUMMARY
This concept of lifetime value has a lot of applicability in: telecom companies like Airtel & Jio, video streaming companies like Hotstar, Netflix & content publications, Amazon Prime, etc. A lot like marketing research & development activities too face the same accounting problem. The first way of using this to your advantage is by recognizing the mismatch in reported current earnings & unreported future earnings on account of these intangibles.
TRADITIONAL VALUATION METRICS LOSING ITS POWER IN AN INTANGIBLES WORLD
The assessment of intangibles remains one of the most ignored parts in valuation especially with investors who prefer to analyze companies using traditional metrics like the PB ratio & PE ratio. Truth be told, metrics like the PB ratio work particularly well with old-economy companies like energy, manufacturing, etc. But as companies become more service and technology-oriented these same metrics seem to be losing their predictive power in equity value creation. In the same context, the PE ratio looks artificially high in the case of companies with digital investments which might look like a very rash assessment a few years down the line. These inaccuracies happen when investors take these accounting figures at face value which almost always leads to incorrect valuations.
INTANGIBLE ASSETS ARE INCREASINGLY THE MAIN DRIVER OF VALUE CREATION
Let’s have an overview of some intangibles-specific valuation models that might be of assistance here.
RELIEF FROM ROYALTY METHOD (RRM)
As the name suggests, this approach calculates the value of intangibles on the basis of hypothetical royalty payments that would have been saved by owning the asset rather than licensing it.
WITH AND WITHOUT METHOD (WWM)
What this approach essentially says is that an intangible asset’s value is nothing but the difference of two discounted cash-flow models. One that represents the business’s status quo with the intangible asset in place minus scenario two which represents the business’s worth without that intangible asset.
REPLACEMENT COST METHOD
This approach is a bit like reverse-engineering, meaning we are looking to arrive at a present day cost of constructing an intangible asset using materials, machines and talent at today’s prices.
#ETMoney #Intangibles
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