By Dan Callahan, GWG Holdings, Inc., Director of Communications
Add up all the physical assets controlled by the ten most valuable public companies in the world in 2020 and you get a sum that is less than three percent of their $11 trillion enterprise value*, according to a Brand Finance study on Sept. 1, 2020.
“Intangible assets” and “goodwill” make up the rest of the valuation and often reflect the crown jewels of the world’s most successful companies. These assets include software and data, intellectual property and patents, research and development, and the brands of the companies themselves, giving these companies a major competitive advantage.
Intangible assets and goodwill have become the largest determining elements of the value of many of the most successful companies around the world. Stock investors reward these companies because they believe these assets represent capabilities that will drive revenue far more than tangible assets, especially now that the Covid-19 pandemic has changed the dynamic of work, sales and profitability.
The companies holding the greatest amount of intangible assets are the digital companies that have become major drivers of the U.S. economy. A 2018 Harvard Business Review story* written by accounting professors from Dartmouth, Columbia, and the University of Calgary cited the difference between Walmart’s $160 billion of hard assets that produced a $300 billion valuation and Facebook’s $9 billion of hard assets producing a $500 billion valuation.
Asset manager Blackrock had only $14 billion of its $106 billion enterprise value in tangible net assets. The other $92 billion was in intangible assets and goodwill.
“The economic purpose of these intangible investments is no different from that of an industrial company’s factories and buildings,” the Harvard Business Review story said. “Yet, for the digital company, investments in its building blocks are not capitalized as assets; they are treated as expenses in calculation of profits. So the more a digital company invests in building its future, the higher its reported losses. Investors thus have no choice but to disregard earnings in their investment decisions.”
It is a shift that began after the 2008 financial crisis and has increased this year during the Covid-19 challenges, boosting the value of intangible-heavy companies like Google and Facebook. By comparison, tangible assets of the S&P 500 companies* in 1985 were valued at twice the value of the firms’ intangible assets.
The result is that earnings now have less of an impact on the returns of a stock. A 2014 study by the Journal of Accounting and Economics* found that earnings only explained 2.4 percent of variation in stock returns. And a survey by investment firm Columbia Threadneedle* found that 95 percent of institutional investors they surveyed believed that intangible assets contain crucial information about the future strength of a company’s business model.
The Largest Companies by Intangible Value
|Rank||Company||Sector||Intangible Value||Share of Enterprise Value|
|1||Microsoft||Internet & Software||$904B||90%|
|2||Amazon||Internet & Software||$839B||93%|
|3||Apple||Technology & IT||$675B||77%|
|4||Alphabet||Internet & Software||$521B||65%|
|5||Internet & Software||$409B||79%|
|7||Tencent||Internet & Software||$365B||88%|
|8||Johnson & Johnson||Pharma||$361B||101%|
|10||Alibaba||Internet & Software||$344B||86%|
|12||Procter & Gamble||Cosmetics & Personal Care||$305B||101%|
|13||Anheuser-Busch InBev||Drink & Brewing||$304B||99%|
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Information obtained from third-party sources are believed to be reliable, but we do not guarantee that the information is accurate or complete. The material presented reflects information known to the author at time written and is subject to change without notice. Registered Representatives of GWG are licensed through Emerson Equity LLC member FINRA/SIPC. GWG and Emerson Equity, L.L.C. are not affiliated entities.