VALUE: After Hours (S07 E32): Amazon, Intangibles and the J-Curve

During their recent episode, Taylor, Carlisle, and Kai Wu discussed Amazon, Intangibles and the J-Curve. Here’s an excerpt from the episode:

Tobias: Why wouldn’t the value of intangible assets just turn up in greater earnings or cash flow? Or, why can’t you measure it just as a flow rather than having to do these additional exercises to show where that intentional?

Jake: You’re trying to get out in front of it, aren’t you, a little bit and see when is you going to get those big paydays?

Kai: Yeah, I think it goes to the J-curve idea, which is that a lot of intangible investors. You think about Amazon being the perfect example, a company that never made a dime for their investors for decades and now is worth multiple trillions of dollars. How do they do it? Well, they basically reinvested into the business, building out customer goodwill through charging prices that were very competitive for their building logistics networks, the network effects and then ultimately AWS, which has been a big profit center.

And so, yeah, if you look at the trailing earnings, trailing free cash flows, it looks okay, but still very expensive. If you look at it on an intangible investment basis, actually, they’re making really interesting investments into these intangible assets. And for a long time, it would have been a very attractive stock on that basis.

Tobias: So, you say that it reconstitutes these value indexes, so that you find inexpensive relative to some measure makes them– You’re pumping up the measures of some of these, so you can see how truly undervalued they are.

Kai: Yeah, relative to like a more traditional price to book or even a price to earnings, any traditional value metric, you’re going to end up with a portfolio composition that is a little bit different. So, less banks, less insurance, less asset heavy businesses, materials, energy, etc., and more technology, consumer brands, communications, healthcare.

It will vary by region. One thing we find is applying the same methodology to the US into the non-US geographies, you end up with a lot more tech in the US, because that’s where all the talent and innovation is. A lot more brand outside the US, which is if you’re thinking about Europe, that makes sense.

And then, through time as well. Through time, things have changed. Obviously, network effects are a lot more important today than they were 20 years ago, because now you have six, seven billion people connected on Facebook. Back in the day, we didn’t have that. So, these things can change through time.

Also, if you go back 100 years, none of this is important [chuckles] or very insignificant. And so, it is a dynamic process by which intangible assets have become increasingly important for the day-to-day investor.

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VALUE: After Hours (S07 E32): Amazon, Intangibles and the J-Curve

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