Intangible Assets: The Invisible Value Driver

Successful investors will realize that technology doesn’t just breed new companies but also demands new ways of valuing them.

Instead, value intangible assets even if the company doesn’t. How much is Lululemon’s brand worth? How much are Facebook’s network effects worth? How much is Costco’s customer loyalty (earned through investing in lower prices) worth? None of these appear on the financial statements, but they are core value drivers for these businesses.

First of all, it’s no longer sufficient to look at traditional financial metrics, especially ones associated with profitability. While much of the business world has adapted to the information age, accounting has not.

If you successfully predict the earnings of a business, there’s a good chance the stock won’t respond in alignment with the news. Making money in the stock market is more complicated than accurately predicting the future.

The implication for investors? Legacy financial metrics should play a lesser role in analyzing businesses.