Michael Mauboussin On Valuing Intangible Assets

Episode Summary

Executive Summary: The episode explores how the rise of intangible assets—R&D, branding, customer acquisition, software, and network effects—has made traditional accounting less useful for valuing modern companies. Guest Michael Mauboussin argues investors should adjust for these investments, focus on cash flows and unit economics, and reverse-engineer what growth is implied by current prices rather than rely solely on outdated value screens.

Main Topics: The market’s shift toward intangible-driven businesses (Priority: 5/5): The hosts frame the year’s stock-market rally around tech and other ‘new economy’ firms whose value is increasingly tied to intangibles rather than factories or inventory. Why traditional accounting can mislead investors (Priority: 5/5): Michael Mauboussin explains that older accounting rules expense many investments immediately, making profitable companies that invest heavily in intangibles look less attractive than they really are. How to distinguish maintenance spending from growth investment (Priority: 4/5): A key analytical task is separating spending needed to keep the business running from discretionary outlays intended to create future value, especially in mature tech companies. Valuation should start from the market price (Priority: 5/5): Mauboussin emphasizes an ‘expectations investing’ approach: start with market valuation and infer the growth, retention, and profitability assumptions needed to justify it. Value investing vs. factor investing (Priority: 4/5): The discussion distinguishes between value as ‘buying something for less than it is worth’ and value as a statistical factor tied to low price-to-book or price-to-earnings ratios. Intangibles in M&A versus organic investment (Priority: 3/5): The guest notes that intangible assets are recognized in acquisitions but often ignored when created internally, highlighting a gap in how accounting treats the same economic value differently.

Key Arguments: Intangible investment has become economically central, but accounting standards still reflect a world dominated by tangible capital. Expensing R&D, branding, and customer acquisition can make firms appear less profitable even when they are making high-return investments. Free cash flow remains a critical measure because it is less distorted by accounting classification than net income. Investors should not wait for accounting rules to change; they should adjust their own analysis to reflect intangible capital. The market has already partially recognized this reality, so better analysis is more about keeping up with pricing than discovering a hidden edge. For mature tech firms, a meaningful portion of R&D is maintenance rather than pure growth, so not all R&D should be treated equally. Value investing still makes sense as a philosophy of buying below intrinsic value, but traditional factor screens may be less reliable in an intangible-heavy economy.

Data Points: Podcast report length: 5 minutes or less - Intro for Bloomberg’s Stock Movers product Time period comparison: 1970s vs. 2020 - Accounting rules from the 1970s may not fit a pandemic-era economy Microsoft adjustment: cash earnings: +15% - After capitalizing some intangibles using the Holton framework Microsoft adjustment: invested capital: +80% - Reclassifying intangible spending materially increased measured capital Share of U.S. listed companies losing money: 40% to 50% - Used to show why negative earnings alone cannot define a bad investment Factory depreciation example: 20 years - Illustrates straight-line depreciation for a tangible asset Annual depreciation in example: 5% per year - A $1 billion factory depreciated over 20 years Historical investment mix: Tangible investments were double intangible investments in the 1970s - Shows the earlier economy was more asset-heavy Current investment mix: Intangible investments are 1.5 times tangible investments today - Evidence of a structural shift toward intangibles Expected career length vs real estate investing claim: 40 years vs. 15 years - From an unrelated ad read in the transcript Bloomberg newsroom size: 3,000 journalists and analysts - Mentioned in podcast promotion copy

Pivotal Quotes: "The rise of intangible investments means that the bottom line is now a mix of earnings and investment." — Michael Mauboussin: Core thesis on why income statements can understate the value of modern businesses "Don't wait around for the accountants to make your, you know, to try to, in quotes, make your life easier, figure it out yourself." — Michael Mauboussin: Advice to investors to adjust analysis rather than rely on changing standards "What you should do is start with the stock price and the market value and then reverse engineer what has to happen for that to make sense." — Michael Mauboussin: Describes his expectations-investing framework for valuation

Implications: Investors need better mental models for software, platforms, and brand-heavy firms. Valuation will increasingly depend on cash flows, customer economics, and adjusted capital measures rather than raw accounting earnings or legacy value screens.