Hope this blog finds you all doing well. Once again, we see the traditional “brick and mortar” accounting valuation techniques not reflecting what the market sees or pays. Companies that haven’t produced a profit have been selling for astronomical values. For example, according to a recent article in Bloomberg “Oddball valuations boost case for changing smokestack-era rules”, Autodesk Inc. which have been losing money for almost three years along with its negative book value, had its stock gained 23 percent which almost double the S&P 500. What the heck is going on (lol)? NYU professor Baruch Lev in his recent book, “The End of Accounting” demonstrates how accounting has lost its relevance in the 21st century. Accounting that worked for shipbuilders and oil drillers are not the same for the new, intangible-based economy. Not recognizing intangible assets can push down both profits and book value in businesses that depend on research and marketing, which are increasingly important in the global knowledge economy. Just think Tesla, Nike or Gilead Sciences.
The bottom line is that “You’ve got all these assets that don’t show any value in their financial statements that are just becoming more and more valuable in today’s society,” said Travis Fairchild, a fund manager at O’Shaughnessy Asset Management in Stamford, Connecticut. Further, spending on research and sales as a percentage of revenue rose to 14 percent in 2017 for S&P 500 stocks, compared with 7 percent a decade ago, data compiled by Bloomberg show. More astonishing is that there are now 187 stocks worldwide with negative net assets and a market value of at least half a billion dollars — with an average return of 27 percent in the past year — compared with 90 a decade ago, data compiled by Bloomberg show. Professor Lev pointed to the example of Kite Pharma Inc., which had posted a loss every quarter since its public debut when Gilead Sciences Inc. bought it for $12 billion last year. What was Gilead after? Kite’s cancer therapies. It is in my opinion that it is only a matter of time when financial reporting will adjust to the new times. Until next time……