Intangibles now represent a greater share of value at companies: Aswath Damodaran

While intangibles like brand value and capable managements have always been part of valuating companies, they account for a higher share of firms' value now, valuation guru Aswath Damodaran said.

In a blogpost on October 6, Damodaran -- a professor of finance at NYU Stern School of Business – said investors have always paid premiums for companies with great management.

He cited the example of the Nifty Fifty stocks of the late 1960s in the US, which had Coca Cola, McDonald's and Pfizer in the mix, all deriving significant value from intangibles.

However, intangibles account for a higher percent of value now.

“Looking at the top ten companies in terms of market value across the decades, you can see the shift towards companies that derive the bulk of their value from intangible assets,” he said.

In 1980, IBM was the largest market cap company in the world, but eight of the top ten companies were oil or manufacturing companies.

“With each decade, you can see the effect of regional and sector performance in the previous decade; the 1990 list is dominated by Japanese stocks, reflecting the rise of Japanese equities in the 1980s, and the 2000 list by technology and communication companies, benefiting from the dot-com boom.

“Looking at the top ten companies in 2020 and 2023, you see the dominance of technology companies, many of which sell products that you cannot see, often in production facilities that are just as invisible,” he pointed out.

Also Read: Wild swing between pessimism & optimism in the market to continue, says Damodaran

Adding to this trend, companies going public in the last two decades have unformed business models -- money-losing companies with growth potential.

While companies that were listed for much of the twentieth century waited until they had established business models to go public, the dot-com boom saw the listing of young companies with growth potential but unformed business models (translating into operating losses), and that trend has continued and accelerated in this century.

“Whatever you may think about these companies, it is undeniable that the bulk of their value comes from growth assets, and that value rests on perceptions and expectations, and a willingness to pay for things that are not tangible yet,” Damodaran added.

The Accounting Challenge with Intangibles

The intangible debate is most intense in the accounting community, with both practitioners and academics arguing about whether intangibles should be "valued", and if so, how to bring that value into financial statements.

“The accounting obsession with valuing intangibles comes from their focus of financial balance sheets are measures of company value, and the recognition that not including intangibles leaves a gaping hole in that value,” he further said.

Accountants, in trying to value intangibles, are trapped in a vice of their own making. If you expense what you spend creating intangibles, which accountants do with R&D and brand advertising, those intangibles will not show up as assets, he pointed out.

All of the discussion and debate in accounting about intangibles has translated into little tangible change in balance sheets, with goodwill (a plug variable, not an intangible) accounting for 60 percent of accounting intangible asset value, he said.

In intrinsic valuation, there is no distinction between intangibles and tangible assets, since any asset that generates cash flows or affects risk is in value. In a well-done intrinsic valuation, intangibles should be in your valuation inputs and value.

The Birkenstock IPO

Damodaran uses the example of footwear brand Birkenstock to demonstrate the rise of intangibles in company valuations.

Earlier this week, Birkenstock, the German premium footwear brand backed by private-equity firm L Catterton, filed for an initial public offering in the US. It has targeted a fully diluted valuation of about USD 10 billion, as per a Reuters report.

“Birkenstock is 250-year old company, family-owned and run for much of its life. Unlike some of its brand name peers in apparel and footwear, its product pricing is modest and it attracts a diverse customer base,” Damodaran said.

A new management team, brought in by the family in 2012, has allowed Birkenstock to rediscover growth, without compromising its mission or diluting its brand value.

“I built my Birkenstock valuation story around its intangibles - good management and the Barbie Buzz (growth), brand name (margins) and celebrity clientele (more efficient growth) and value it at 8.38 billion Euros,” he added.

Deconstructing all that value into individual intangibles shows that brand names adds the most, followed by superior management, with celebrity customers and the Barbie Buzz having smaller add-on effects, Damodaran noted.

The Margot Robbie-starring blockbuster ‘Barbie’ shows her wearing Birkenstock footwear, which is also a favourite with many celebrities.At its offering pricing of 9.2 billion euros , the company and its bankers seem to be betting that the good vibes about the company will outweigh the bad vibes in this weak market, but that is a gamble, he added.