Wednesday, 25 November 2015

Nasdaq: shifting tides of value and the IP tidal wave

The IP Analytics contribution to this week's IAM Weekly Industry Reports, researched and written by Aistemos, addresses the vagaries of the Nasdaq stock market, home to some of the world's best-known and most highly-capitalised businesses. How does the Nasdaq valuation of stock reflect companies' intangible assets -- and in particular their IP portfolios? 

You can read this analysis below or enjoy it on IAM here.


Founded in 1971, Nasdaq has been a symbol of the ever-changing environment of high-tech and new-tech investment that has characterised its 40-plus years of operation. However, as the Financial Times recently described the institution as “down but not out”, the time seems propitious to take a look at the largest Nasdaq constituents from the perspective of their IP holdings. A telling comparison addresses the ever-growing part of intangibles as part of corporate value, currently estimated at 84% of the S&P 500: is there really a correlation between growing IP holdings and corporate value? And if we agree that patents are a proxy for innovation output, can we see indications of the increase in innovation output being understood by the financial markets and reflected in the value of companies?

Stock price volatility has been a Nasdaq leitmotif and the largest constituents of the index have changed considerably over only the past 15 years. Against a background of economic peaks and troughs culminating in the 2008 sub-prime crash, not to mention millennium bug panic, the dotcom bubble and the events of September 11 2001, even the most stable listed corporations could be expected to reflect stock price fluctuation. Given the market-changing nature of the high-value intellectual property held by some Nasdaq-listed firms and the impact of real and imagined disruptive technologies, the fluctuation factor is endemic. 
What does the Nasdaq data tell us? First, only four companies (highlighted in the table below) appear in the top 15 in both 2000 and 2015. If market capitalisation is taken to be the measure by which listed companies are assessed, some of the world’s leading innovators with proven track records appear to be worth considerably less now than in 2000. Only Qualcomm has kept a fairly steady market capitalisation.
Source: Cipher, Thomson Reuters, Wall Street Journal, Google Finance
Admittedly, 2000 was a boom year in terms of company valuations, especially in the high-tech sector. But when looking at the development of patents over the same period, the development has been dramatic, often five or even tenfold. The table below highlights the dramatic change in market cap and patent portfolio for the four companies seen in both lists.
Sources: Cipher, Thomson Reuters, Wall Street Journal, Google Finance
Focusing on the growth of patent portfolios, the picture is equally impressive. The graph below plots the eight companies of the existing top 15 with the largest patent portfolios, and shows that the growth over the past 15 years is impressive. Not all growth is organic, of course (Google buying Motorola is probably the most well-known transaction), but that is common for growing companies (and subsequent market cap) in general.
Source: Cipher, Thomson Reuters
Aside from their technology, Apple, Microsoft, Google, Facebook, Amazon and most other Nasdaq trailblazers also hold highly rated brand assets, listed in the Forbes Most Valuable Brands for 2015. Thus Apple, with a market capitalisation of $663.1 billion, owns the rights to the Apple brand which is valued at $145.3 billion and Microsoft, valued at $351.8 billion, places a value of $69.3 billion on the Microsoft brand. Many of the brands in question were already fairly well established in their respective markets in 2000 (as was the case for most Nasdaq leaders in 2015), so it can only be assumed that brand value was already taken into account to some extent in stock prices for that year and is now considered with the brand value numbers mentioned above.
Might it then be the case that patents matter less? Surely not. People in the IP industry can show the many ways in which patents are increasingly important to companies and how they can be used to generate financial returns. The chart mapping US patent litigation below, looking at the total number of ongoing lawsuits over time for the existing Nasdaq top 15, shows that it has increased from 29 in 2000 to a peak of 800 active suits in 2013.
Source: Cipher
The Samsung v Apple suit is well known and a PWC report tracked the largest damages awards in recent years. Apple and Microsoft are involved in three of the 10 largest awards, for a total of nearly $2.7 billion in damages.
On the basis of the accepted wisdom that intangibles represent a large part of corporate value and that brands are recognised and valued by the financial community, one may wonder how patents are treated by the financial community. The importance of patents to corporates is evidenced by ten to twentyfold increases in patent portfolios, hundreds of ongoing patent suits and billion dollar settlements.
The market cap for our four champion companies found in both top 15 lists clearly decreased at the same time as patent portfolios, patent lawsuits and settlements surged. This invites the question of whether the financial community understands patents. Admittedly, there is more to intangibles than patents alone, but it seems counter-intuitive that even as experts agree about the increasing importance of intangibles, a substantial and registered (ie, publicly available) intangible asset class does not seem to correlate to market cap performance. In this digital day and age and with the advent of big data and analytics, this industry is as well positioned as it has ever been to help the financial community better understand patents and intangibles.


  1. So basically what? Nasdaq valuations don't count for anything. But doesn't the same apply to all the other stock exchanges? In fact, if investors and analysts use the same methods of assessment, it doesn't matter whether companies go on to Nasdaq or elsewhere does it?

  2. Interesting post. Looking at the four companies above discussed above, I note that where there are more patent grants, market cap seems to fall less. This would suggest that quantity of patent grants may have some protective effect on market cap. Given the increase in litigation over the same period, it could be that large patent portfolios are being used defensively to protect against litigation, and this, in turn, is having a positive influence on market cap.

    It could also be that these four companies are using patenting as a way of trying to protect their market share from the other companies who are now dominating the new tech paradigm of cloud and online web services.