Valuation of Public Equities, Including Alphabet, Amazon, Apple: Capital Market Pricing of Opaque Intangible Assets

POSTED BY ipCG Team AT 8:07 A.M. August 01, 2016

Below is an excerpt from the August, 2016 white paper. Read the full paper here.

Summary

Investors have driven the valuations of these 3 tech giants (and a select few others) well past their peers, not to mention into a different league from leaders in most other sectors. Elite private companies are achieving similarly high multiples, given their access to a large supply of capital competing for few high yield options.
Why and how do investors assign a premium on innovation-related growth potential?

The answer requires dissecting the promise of growing cash returns on invested capital.  In summary, these equity investors look beyond traditional financial reporting to see the cash ROI in technology-based intangible assets.

Takeaways for diligence on knowledge intensive businesses

• Go beyond traditional financial statement analysis.  Projecting cash flows and calculating intrinsic value also requires a deep dive into technology-based resources and capabilities. 
• Uncover and then test competitive advantages that are largely off-balance sheet.  These intangibles include digital know-how, patent position, brand equity with customers, and so on.  
• Consider how the economics of a technology-intensive business differs from a fixed asset heavy incumbent, particularly in its ability to deliver profitable new growth.
• Avoid pricing shares for perfection, as models will have extreme sensitivity to growth rates.
• Inform investment theses for acquisition targets or position in lower profile equities by understanding intangibles and the associated market premium.