Evolution of Corporate Balance Sheets
For decades, physical assets such as buildings, equipment, and inventory represented the primary value drivers of most companies’ balance sheets. However, the advent of the internet marked the transition from a material world to a digital era, giving rise to a new kind of asset: intangibles. Today, we find that leading innovators and disruptors recognize that developing intangible assets—those that can’t be seen or touched, including intellectual property, brand equity, or computer software—is a highly effective way to gain market differentiation, drive pricing power, and generate long-term shareholder value.
As the chart below shows, corporate investments in intangibles have risen steadily compared to traditional capital, particularly over the past twenty years1. We believe that this trend strongly reflects the acceleration in digitization and the proliferation of asset-light business models whose value stems from immaterial assets. The mass migration to a remote work environment during the COVID-19 pandemic further enhanced this trend, boosting the value of several intangible-rich companies.
Figure 1: Intangibles as a percent of property, plant, and equipment (PP&E) in the Russell 3000 universe
Source: Polen Capital and Bloomberg. As of November 2021.
Ingenuity as a Competitive Advantage
These days, innovative businesses are increasingly tapping into intangible assets to build sustainable economic moats. For example, we believe Airbnb’s digital platform carries enormous intangible value acting as a “System of Trust” in the private rental accommodations market.
Airbnb’s platform removes considerable friction so hosts can trust unknown guests, and guests can trust unknown hosts/properties.
In addition, most Airbnb’s user traffic comes directly to its app and website. In contrast, other travel agencies rely heavily on Google search, social media, and digital advertising. This independence, and that the majority of the properties listed on Airbnb are unique to their platform (and are not available to competitors) are a testament, in our opinion, to the brand’s quality.
The value of some intangible assets—mainly those more abstract in nature—is not always easy to quantify and is often excluded from financial statements. However, this does not mean that businesses and investors should ignore them. For instance, corporate culture is becoming increasingly recognized as a unique differentiator in today’s highly competitive business environment. Going forward, we believe companies that harness the power of high-growth intangible assets will likely be well-positioned to navigate the future landscape.
Figure 1 Methodology: Intangible Assets measured as a percent of Tangible Assets in the Russell 3000: The data is generated via an EQS (Equity Screen) in Bloomberg. At each time step, the sum of all then-latest reported data in USD is summed, specifically the Total Intangible Assets as defined by Bloomberg, and the Total Tangible Assets, also defined by Bloomberg. The percentage is then simply the ratio Total Intangible Assets / Total Tangible Assets. No other adjustments are applied.
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of December 2021 may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.
This information should not be construed as a recommendation to purchase, hold or sell any particular security. Holdings are subject to change without notice. There is no assurance that any securities discussed herein will be in the portfolio at the time you review this post or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. For a complete list of Polen Capital’s past specific recommendations for the last year, please contact [email protected]. Past performance does not guarantee future results and profitable results cannot be guaranteed.
The volatility and other material characteristics of the indices referenced may be materially different from the performance achieved by an individual investor. In addition, an investor’s holdings may be materially different from those within the index. Indices are unmanaged and one cannot invest directly in an index.
The Russell 3000 Index is a market-capitalization-weighted equity index that measures the performance of the largest 3,000 US companies representing approximately 97% of the investable US equity market. The index is maintained by the FTSE Russell, a subsidiary of the London Stock Exchange Group.