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.

We have shifted from an industrial economy to an information economy, yet the investments in information assets aren’t recognized in financial statements. They are expensed instead of capitalized. It’s beneficial for investors to change accounting to capitalize intangible assets, but incentives for corporate managers and auditors make it unlikely t... See more

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

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.