The most fundamental rule to asset valuation is, “What is something worth?” When you approach this question you analyze three basic components. Your first component is assets. The second component is cash flow. The final component is market. Each one of these components illustrate how valuable something is.
Assets are inherently valuable. I am not talking about intellectual property, trade secrets or goodwill. These assets are intangible. Assets that are intangible have value only to competitors, businesses or those that know how to use them.
Assets historically held intrinsic value. Intrinsic value is value in itself. A gold coin for instance has the value of its gold content. An I-phone has the value of its materials. Real estate has the value of its construction and land. In all instances conventional assets have a “floor” on what someone can get regardless of demand. Demand is basically the market. More people want it, the more you ask for when you sell. Less people want it, the less you can get when you sell. If no one wants your product it’s worth nothing.
Nike’s trade secret on shock shoes may only hold value to competitors. True people enjoy the product but the method to create them is only valuable to certain people. The end product has vast application but the method of designing them applies to certain people. A book’s knowledge is valuable to the everyday person but only if the person recognizes how to use it. The everyday person can’t barter trade secrets for bread.
Understanding the important concept of asset valuation unlocks the reason why a bubble in the tech industry is coming.
If you remember nothing from this article I want you to remember the word “Goodwill”. To understand exactly what Goodwill is let’s summarize it as nothing to anyone but the person who owns it.
Goodwill in accounting is an intangible asset. Goodwill arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable. Goodwill does not include identifiable assets that are capable of being separated or divided from the entity when it is sold, transferred, licensed, rented, or exchanged.
In other words…“The value stays with the business. If there is no business the value is zero.”
CASE STUDIES FOR CURRENT GOODWILL TECH COMPANIES
Uber Technologies Inc (UBER) is currently trading at $31.37 effective 4PM EDT on November 1st 2019. Uber for all of its difficulties generating a profit only reports a good will of 153mm USD on its balance sheet. Uber Total Assets are 23.988bn. If you were to liquidate Uber on its balance sheet it appears there would actually be something to sell. Uber has 8.658bn in classified current assets and 15.33bn in noncurrent assets. In the noncurrent assets column 2.5bn is property and equipment.
Uber’s Goodwill represents only 0.63% of its total asset base.
Facebook (FB) is a monstrosity. I am not here to bash Facebook. Facebook has the revenue, user base and data to support a thriving social media market place. Facebook for the time being is a player that is here to stay. Our social media culture utilizes its platform and Mark should be credited with building a great user platform. The thing I will point out is 18.3bn of its 97.3bn is based on Goodwill. If you factor in 1.294bn in “Intangible Assets” you get 19.595bn in assets that are worth nothing outside Facebook.
Facebook’s Goodwill and Intangible Assets make up 20.13% of its total value.
In other words approximately $38.97 of Facebook’s share price of $193.62 is worth nothing outside of the company.
UNDERSTANDING THE BUBBLE
A bubble is nothing more than vast over value in a collective market.
Uber’s current share price is pretty accurate for its market presence. Uber needs to fix its profitability factor if it intends to be sustainable but Uber’s market presence is legitimate. Uber has nearly bankrupted taxi companies. I argue Uber’s market presence is worth something to a lot people in the transportation industry. Uber’s revenue model cannot sustain itself indefinitely. How Uber adjusts to capitalize off its market presence in the future remains to be seen. The one thing we cannot dispute is Uber is not loading its balance sheet up with intangible assets.
Facebook on the other hand has a healthy premium. Facebook’s value depends on its ability to retain users. The Facebook user base is valuable (undisputed) but Facebook could be replaced in 5 years. Don’t believe me? Ask people over 30 about Myspace. Myspace was the leading social media website at one time. What happened to Myspace? Myspace is an interesting case study that lost its edge when Tom stopped adjusting to the market. There is absolutely no secret that Facebook’s success is between the two eyes of Mark Zuckerburg. The hearings have made it abundantly clear (along with the dissent article here in Medium) that Mark controls everything.
These are two well known companies. There are other companies that increasingly cite the FB percentage to push the envelope on valuation. Some companies are claiming up to 70% of their value based on intangible assets. As more and more companies push for values found only in the company themselves (i.e. nothing more than just the name) we start to approach a similar situation to the .com boom.
VALUE VERSUS PREMIUM
Understanding the value of something means asking a basic question. The basic question you need to ask is, “What is this worth to someone that does not run a business?”
If you roll a dud on that question and answer it as, “Nothing.” You are getting into a very risky proposition. Personally I do not like things that have no value to anyone but a couple people. Once those people don’t want it no more it plummets the value of my holdings. I look at the FB and Uber’s of the world as cyclical opportunities. I find it difficult to imagine Facebook around 100 years from now. I do not find it impossible to imagine Uber around 100 years from now. I am certain Shell will be around 100 years from now.
As you look at your asset holdings ask yourself, “Am I planning for the long term or am I just trying to make some money quickly.” If you are on the quick side go for Facebook. If you want something sustainable grab Shell.
Real wealth is found in value not premium. There are many valuable tech companies. Make sure you look at the balance sheet when you decide their valuation. Don’t get caught staying too long in the premium market. Right now that is what the tech market is. The tech world is just a guise for the “service world”. Instead of people providing the service it’s a application. Never forget that. Gain prospective on the real issue driving institutional and bank decisions for technology investment. Follow me on Medium or subscribe to my newsletter to learn more insightful advice.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM), Master Financial Planner (MFP) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com