Analysis finds even accounting for intangible assets isn't enough to account for soaring prices
Stalwarts of value investing have proposed several reasons to explain the continual rise in valuations of tech stocks, including the possibility that intangible assets are becoming a more major contributor to companies’ success. But according to a new paper from Research Affiliates, even that explanation falls short.
“Mega-cap growth stocks, notably, the FANGs, still look expensive after incorporating intangibles in the value of firm capital,” said authors Brent Leadbetter, Feifei Li, and Juhani Linnainmaa.
As reported on Institutional Investor, the three examined how FANG stocks – Facebook, Amazon, Netflix, and Google parent Alphabet – would change if their balance sheets reflected not just traditional value metrics, but also intangible assets that emerge from heavy reliance on research and development.
“As intangible assets such as knowledge, intellectual property, and human capital become more important to firms’ successes, intangibles’ share of total company capital has grown meaningfully,” the authors wrote.
They estimated that the proportion of the average firm’s book value of tangible assets represented by its intangible assets has risen from roughly 30% in 1963 to nearly 100% today. As an example, they found that IBM traded at nearly twice the price of the average large-cap company based solely on its price-to-book ration. But when accounting for its R&D, the group found that IBM stock traded “at a sliver of a discount.”
But Amazon, which outdid all other U.S. firms in terms of R&D spending, still appeared “quite” pricey even considering the US$94 billion in capitalized research and development it had, according to the researchers.
“After we include R&D spending, it remains expensive at nearly 4.5 times the price of the average company,” they said.
The same analysis revealed Facebook, Netflix, and Alphabet were priced at premiums even after adjusting for the estimated value of their respective intangible assets. The Google parent company was the least overpriced, consistently showing less than double the price of the average firm after intangibles are accounted for.
“[E]xpanding beyond book value to a more complete measure of firm capital will not change the fact that some companies are expensive today regardless of the metric used to evaluate them,” the authors said.
