Hmmm... We are closer than it appears. You wrote "...from an investment point of view, it is necessary to get some handle on the value of IP not already on the books in some form (e.g., good will). Otherwise, it's difficult to know if the relationship between market price of the shares and book value is reasonable."
To me, market price of a company's common shares, in theory, should consist of only one thing: the cash exchange value of the assets a single share represents.
I take as an axiom that these assets (net of liabilities) have two elements: (a) "today" assets as listed in the balance sheet, and (b) "tomorrow" assets that one can reasonably expect the company to accrete.
And these tomorrow assets (expected assets) are the product of the company's future cash flow and business activities.
I suppose where we differ is that I view IP and the other intangible and tangible elements of the company's business cycle as the source from which future value accretes. So to my mind the value of this source is precisely equal to the product that comes out the other end. No more, no less.
So when I come up with a projection of the future cash flows of the business, and reduce it to present value and come up with a fair value of a share, well, when I subtract book value I end up with an intrinsic value of all those squishy intangible assets that aren't on the books.
So to your examples. QCOM is trading at 10x book because folks think it is going to use its IP as a cornerstone of its market power to garner the other 9/10'ths of its value in cash going forwards. AMZN (or LU) on the other hand is trading below book value because it appears that their unique IP applied to their business is likely to ungenerate assets.
But I hesitate to try and single out "IP" from this equation versus, say the meta-IP that Tom, Dick and Harry et. al. (employees) represent. Or brand recognition. Or Cachet. All of these things represent the REASON we think the company will draw increasing revenues at competitive margins. So I am already counting these chickens and avoiding having to count them individually.
I think the converse is daunting. How can you possibly come up with the value of IP by itself? It has no value unless it prospectively generates assets, and then its value is precisely equal to the assets it generates. Thus I prefer to avoid the question that an asset-based valuation begs, and instead look at cash flow. This somewhat neatly side-steps the awful trap of decomposition.
After all, is a person two kidneys, a liver, intestines large and small, veins, lungs, neurons, brain, bones, dermis (epi and otherwise) and so on? Or perhaps there some combination of above that makes each person unique...
John. |
