Intellectual property (IP) helps a business innovate and grow. It can propel the company’s value and give it a competitive edge. That’s why investors should not overlook IP when assessing an investment opportunity. IP harnesses the innovative depths of a business and can provide investors with a breadcrumb trail to profitability and iterative growth.
What is Intellectual Property (IP)?
Intellectual Property (IP) includes the branding, trademarks, copyright and trade secrets that a company owns. These are intangible assets that can be hard to pin down and identify, so laws exist to protect the creator and the business entity.
When a company spends time building a brand and innovating its suite of products and services, the value of its IP assets fluctuates. But a company that pays heed to its IP and regularly releases news flow to showcase the breadth of its intellectual property could help increase brand awareness and overall market value.
Why You Should Value IP
Investors should consider a company’s intellectual property value before making investment decisions. That’s because its brand, trademarks, patents, and trade secrets can hold the key to future success. Indeed, intellectual property represents equity in the business.
Seek an IP-Moat
The intellectual property value of a company provides a moat, giving the company a competitive advantage. Having a handle on IP helps decision-makers determine the breadth of company profit margins and cement a market-leading position. Disney, Netflix and AbbVie are examples of companies harnessing the strength of their IP moat to boost their profits and become market leaders.
By uncovering the layers of a company’s business model, investors get insight that others might miss. Therefore, understanding the business’s IP advantage helps investors to make smarter decisions. This knowledge also helps an investor recognize how much of a buffer the IP value lends the company in relation to its competitors.
IP is relevant to companies covering the spectrum of stock market industries. Here are a handful of examples:
Disney (NYSE: DIS) has possibly the most valuable IP on the planet. It has maximized the potential of every iconic Disney character ever created and continues to innovate and grow the brand's value to appeal to old and young alike.
Apple (NASDAQ: AAPL) likely takes second place when it comes to global IP value. The company has over 7200 patents and is the most coveted gadget brand of the digital age.
AbbVie (NYSE: ABBV) has 92 approved drugs and 86 US patents protecting AbbVie drugs. It also has over 1,600 international patents. As a biopharmaceutical company, it has built strong intellectual property rights that have helped elevate its worth.
In 2020, AbbVie agreed to allow the use of its intellectual property by other companies around the world to step up treatment for coronavirus patients. In the two years following, its share price soared 133%, raising its market value from $115bn to $280bn.
Baker Hughes (NYSE: BKR) has obtained several patents for subsea and offshore drilling equipment. Over the years, it has also banked IP rights covering oilfield products, services, and digital solutions. As an oil services company, it is a vital cog in the energy industry. Baker Hughes regularly seeks recognition through awards which help cement its credibility and enhance its IP.
Estée Lauder Companies (NYSE: EL) is famous for its high-end cosmetics lines. The company owns the rights to multiple brand identities, which contribute to its overall IP and market value. The company regularly innovates, reinventing and marketing new product lines to attract and retain consumers while consistently expanding its IP.
How to Value a Company’s IP
A company's intellectual property valuation is a metric that investors should pay attention to, but a method for IP valuation is not always clear, particularly when it comes to lesser-known companies.
A stock’s market cap doesn’t always accurately reflect a company’s intellectual property value. Many factors contribute to share price volatility, but understanding a company’s IP can help eliminate doubt in that business’s chances of survival.
While COVID-19 and global supply chain disruption wrought havoc on Disney Parks and travel, the sheer breadth of Disney’s IP gave investors confidence that the company would survive the turmoil.
Smaller companies don’t have the luxury of big-brand recognition, but investors can watch for signs that a company values its IP. This includes regular news flow, industry awards, patent applications, innovative moves, and indications that it is attempting to corner a market.
Translating these into valuation methods gives investors a competitive edge.
When an investor has a clear understanding of the stocks that have qualified IP value at their core and why, it gives them the confidence to make smarter investment decisions.
Furthermore, if businesses fail to understand the value of their IP, they chance to leave a significant amount of money on the table. The same goes for investors who fail to investigate, recognize, or appreciate the value of a company’s IP moat.
Many businesses protect their proprietary information by issuing employees, contractors and business stakeholders with non-disclosure agreements (NDA) to keep business information secret. This information has intellectual property value, just like regular business assets have a monetary value. NDA-protected information often comes under the trade secrets banner.
Intellectual property value does indeed have financial value. And that's why companies need to evaluate it regularly to ensure they are not leaving money on the table. A company that regularly updates the market on its latest developments and progress is building a public record of its IP growth.
For investors in micro, small, and mid-cap companies, monitoring IP growth can help them spot early investment opportunities and bargain stocks. That's why IP valuation is an important stock investment tool.