What Are Intangible Assets and What Do They Mean for Investors?

In this podcast, Motley Fool analyst David Meier and host Deidre Woollard discuss: 

• What intangible assets are and why investors need to factor them in. 
• How Accenture has built a global empire by helping businesses advance.
• If the Peloton and Lululemon collaboration will be a win for both brands.

Motley Fool analyst Kirsten Guerra and host Mary Long explore the potential of Roblox both as an investment and as a growing social phenomenon.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 28, 2023.

Deidre Woollard: How do you measure what can't be touched? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst David Meier. David, how are you doing today?

David Meier: I'm doing great. How are you?

Deidre Woollard: I'm doing well. You gave me some food for thought earlier this week because, on the Motley Fool Morning Show for our membership, you talked about valuing intangible assets. I'm thinking about that a lot today with Accenture's earnings because they're intangible. But let's start with the basic definition, what are intangible assets? How do you define that?

David Meier: The easiest way to think about it is a tangible asset would be something I could put in my hands, so an intangible asset is something that is not physical. It's not something I could pick up or touch. It's not a building or maybe some parts in inventory or a machinery and things like that. What it tends to revolve around are things like a company's brand, which is valuable, but it's not something I can see necessarily, or I can feel. It's something I experience. Other examples would be patents. Those are intellectual property that can protect products and services that companies provide. Things like goodwill. When a company makes an acquisition of another company, they pay for the tangible assets, the book value, but they get a lot more, so goodwill, also considered an intangible asset. Yes, it is difficult to value them. Again how important is a brand for a company? If I can't necessarily assign a sales or a cash flow or profits or anything like that directly to the brand even though I know it's valuable, how do I value it? So there are some shortcuts which we can talk about if you like.

Deidre Woollard: I want to talk about Accenture earnings because it's hard for me to fully understand it because it is so intangible. Part of it is the value of the knowledge, it seems like, in the employees' heads and things like that, but this is a massive company. It's over $2 billion market cap, not a household name. We refer to them often as a consulting company, but what's the 30,000-foot view of what Accenture does?

David Meier: Yes, so the best way to think about Accenture, I think, is it wants to provide consulting services to either help a company solve a problem or help a company get better or help a company manage a change. Let me talk about a couple of the different services that it provides. The first one is strategy and consulting. Do we want to take our company and start competing in a different set of markets, like, what Accenture could help consult with the executive team to figure out, what's the right way to do it? How do I assess the competition? What capabilities do I need? Things like that. Another thing that Accenture does is it helps implement technology within a business in order to make it better, so if you're a content creation company, and you don't have software like Adobe, you can hire Accenture to come in, install the systems, help you learn how to use them, and then basically get ready to take and use software like Adobe. It could be process management. It could be companies like Blue Yonder, which is automation. It could be anything, but essentially they help resell technology services in order for a company to get better at what it has or move into or use new technology to help them drive their business forward. Another thing that they do is they help with operations. So if you want to improve whether it's on the manufacturing floor, whether it's your marketing processes, you can contact Accenture, and they will have people come in, look at what you're doing today, make suggestions about what you could do tomorrow, maybe they would also implement a new technology that we just talked about and try to make improvements in order to make your business stronger. Then they have specific expertise within various industries, so they can take the latest and greatest technologies, and they serve different industry groups like communications, financial services, healthcare, government services, resources, oil and gas, utilities, things like that, so essentially, if you need a consultant, they can probably do it. They want to be the one-stop shop for all sorts of consulting problems.

Deidre Woollard: Yeah, absolutely. The interesting thing is the consulting part of it, the technology part you mentioned, that's just like that's growing leaps and bounds. That's their growth area, and they talked about this on the earnings call. Technology transformation begets more transformation and more spending because, of course, and they're trying to strike this note I found interesting on the call, CEO Julie Sweet talked about being optimistic but also being appropriately cautious because we're still dealing with that iffy macroeconomic cycle when it comes to B2B spending. I wanted to zero in a little bit on generative AI because, of course, we have to talk about that. They had 300 million in spending so far, tiny really, compared to their full business. This feels like it's an intangible, it's an unknowable. How do we think about this?

David Meier: One way that you could think about it is, typically, a technology that Accenture is trying to help another company implement is probably pretty mature. That's the bread and butter of what Accenture does. They take known quantities which their consultants are "experts" in, and they can help drive a definitive solution so that the customer feels what they're paying for. Accenture consultants are expensive, so you want to get results as quickly as possible. I think part of the reason why you're not seeing huge revenue, it's still early in the process. Also interesting within that technology realm, Accenture actually has a venture capital firm, so they are constantly looking at new technologies, even making equity investments in them to get an early start on, what does this technology do? What could it do in the future? How could I help somebody implement it? I think what this shows is we're just still really early in the generative AI process. Since Accenture tends to serve bigger customers, enterprise-size customers with big bank accounts and writing big checks, they're just not ready yet. Maybe they're continuing to explore some things on their own with their own employees before bringing in a company like Accenture. I will caveat all this to say is I still think, over time, this is going to be big for Accenture.

Deidre Woollard: Yeah. You mentioned those big customers. They've got customers spending over 100 million in a quarter, just like massive. [laughs]

David Meier: Yes, that's huge.

Deidre Woollard: Yeah. This company is interesting for me. I want to go in a little philosophical direction here. I've tried to understand this company. I've looked at it a couple of times. I listened to the earnings calls. I don't fully understand the business. I understand the metrics. I see things I love. I like the dividend increases. I like the growth here. Do you think it's OK to invest in a company without understanding what the business does? Is it enough to just understand the metrics? How do you look at something like that?

David Meier: Wow, that is a really good question. I would say probably 95% of the time, I want to know exactly what this business does, where they're going, what they're doing today, what they're investing in for tomorrow, what's the situation in the competitive landscape, how much advantage do they have because, for the most part, I am a long-term investor, so I'm looking to buy shares of this company that I know and understand, and I'm expecting to see, this much revenue flow in and this much revenue flow down to cash flow, etc. However there are times in the stock market where you can just look at the numbers or the situation and say, you know what, this doesn't make sense. It's a market anomaly, if you will. You don't necessarily need to understand exactly what the business does in great detail. You could look at the numbers and just say, this is an opportunity. An example, when, a company spins off another firm. There are people out there who can basically look at these and say, you know what, on its own, with its own ticker, I can look at the metrics and just say, this firm isn't trading near where I think it's valued. Maybe they look at some comparables within the marketplace. You don't necessarily need to know the business model, but I think it's probably always in your best interest, especially if you're investing your own capital to understand the model before making any decisions.

Deidre Woollard: Yeah, really good point. You start off with the talk about intangibles and brand. I want to pivot a little bit and talk about a couple of brands that are consumer-facing that have big news today. We've got Peloton and Lululemon. They were rivals in the heart of the pandemic, each trying to get into each other's business. Lululemon went into home fitness by buying Mirror for 500 million. Peloton was going to get into making clothes and shoes. Lulu, they've admitted defeat on the fitness foray. They're shuttering Mirror. They're partnering with Peloton on some of that connected fitness stuff now. Is this a win for Lulu, even though they're admitting defeat in, at least, one part of the fitness realm?

David Meier: I love the question. Let me go back a little bit in order to get to the answer. You described the situation perfectly. Both companies thought their brands could be extended into new markets. There was this intangible asset that they have in their brands, and both companies said, you know what, I can take my brand Peloton. I can take my brand from the exercise equipment and experience realm and put it into apparel. Lululemon said, I can take my apparel brand, and I can put it into the exercise equipment and experience realm. The markets basically said, no, you can't [laughs] to both companies. One thing that I hear a lot of CEOs talk about, whether it's on their conference calls or whether I'm at an investor conference, is they will say our brand is our biggest competitive advantage. Sorry, that is actually 100% wrong. A brand by itself does not create a competitive advantage. If that was the case, every company with a brand would have an advantage of the marketplace. We know that's not the case. You have to have the right supporting capabilities for that brand in whatever you're trying to do in order for it to be an advantage. Peloton had virtually no capabilities in the apparel side of things. Sometimes you can buy those capabilities. Maybe you hire some great people. Maybe you acquire a company that brings those resources. Same thing with Lululemon. Lululemon knows how to design products and market them. They are so good at that. You might think that those capabilities can transfer? They're different market places. They're different experiences. Getting back to your original question, is this an advantage for Lululemon? I think this helps them because, essentially, they can do co-branded apparel with Peloton. They'll get a licensing fee, they'll do some work to help Peloton, but there's not a lot that they're going to have to put into it, so they get some incremental revenue that comes at a very high margin. If it turns out that people really love having these two brands together, there's a call option on that potential upside. But essentially, it's the two brands focusing on the things that they do well and then coming together. That's the better decision than what they were trying to do before. It's going to benefit Peloton. I think they get a little more advantage of being able to use the Lululemon name. But I do think that there is some advantage Lululemon gets in return, like I said, in terms of incremental licensing revenue.

Deidre Woollard: It at least allows them a bit of a graceful exit, and to not anger all of the people that bought Mirror and bought Mirror subscriptions.

David Meier: The other thing that it does is it allows them, if they want to try something like this in the future, they can actually learn from Peloton and its capabilities and see, hey, do we want to try this again, or maybe we do additional partnerships in the future. It's a learning process. It's an investment in learning as well.

Deidre Woollard: Expensive lesson. [laughs] But in terms of thinking about brands like this, it seems to me one of the things with the intangible is trying to value Peloton. Very popular, very sticky, now maybe less so. When you're thinking about the power of a brand, is it on the rise? Is it on the wane? What things do you look for outside of, of course, sales growth and things like that?

David Meier: Yes, you're exactly right. Sales growth is the most important thing. Basically, does a company with a brand have, again, the right capabilities to support that brand and drive market share which drives revenue? The other thing would be margins. Can I combine those things efficiently in order to get a good return on the investments that I'm making, not only in the brand but maybe the distribution of my brand, if it's products, the creation of the products. There's a lot of things that you can measure, but to me again, at a high level, it's, what are the capabilities that support that brand? If we use a classic example like Coca-Cola, Coca-Cola delivers an experience through its drinks, but what does it do super well, more so than a lot of other consumer product companies? My goodness, their marketing is unbelievable. In the holiday season, people look forward to seeing what are the polar bears going to be doing next?

Deidre Woollard: Yeah.

David Meier: I think that's the perfect example of, again, it's not just Coke as a brand. People know its products. People have experiences with these products when they consume it, and they have experiences outside of the product which reinforce the experience, drive the brand higher, give Coca-Cola more value in terms of revenue and cash flow that they can reinvest back into both their brand and the things that support their brand. It becomes a virtuous cycle at that point. Again, having the brand by itself doesn't mean anything. You have to be able to translate that brand into experience, have the customer translate that experience to opening up their wallet and so on and so on. When you can do those types of things over long periods of time, then you can say, yeah, this brand is valuable. If you want a quick measure of how valuable a brand can be, if you take the tangible book value of a company, which is the difference between the assets and liabilities on its balance sheet and then subtract that from the market cap of the company, its number of shares times share price, the difference between them is a proxy for the value of the brand. 

Deidre Woollard:  Interesting. Thank you for exploring the intangibles with me today, David.

David Meier: You're very welcome. I love it. 

Deidre Woollard: Roblox is a social and gaming network, a content platform, and so much more. Kirsten Guerra and Mary Long dive into how Roblox is growing up along with its users. 

Mary Long: Kirsten, you've done some boots on the ground, maybe actually, the more correct term is boots in the ether research on Roblox and that might be a worthwhile place to start. What is Roblox? Can you walk us through your experience from signing up to picking and actually playing a game?

Kirsten Guerra: Hi, Mary. Thanks for having me on the podcast. I think you said it right there in your question. Roblox is an experience, and quite literally, the company wants us to call what you do on their platform experiences and not games. Gaming is a very big element of Roblox, but it is also a social network. It's also a content platform. To zoom out, what it looks like is that you would log into this online platform. You can do that from your phone or desktop, laptop, a console like an X box or a VR headset. Already you can tell it's very widely accessible. You would log into this flat interface of experiences that you can pick from. You would click on one that peaks your interest and you would likely enter what is a three D world, and from there you can just explore if it's more of an experiential experience like a concert or a play through if it's more of a traditional game-like world, and you'll move through that world with an avatar, which at some point you might want to change the look of and change how people perceive you, which brings up a very important concept to understand with Roblox, which is Robux, their in-game, virtual currency.

The appeal of Robux broadly is that they operate on this freemium model. It's free to play, which attracts a ton of people, but if you want an elevated experience, you can do that by paying for certain things. If I'm in the app, I can translate my real world currency into Robux, and I can use that for digital clothes or items for my avatar. You can buy things like game accelerants or other exclusive in-game features, so think like if you're playing a racing game, and there's a certain car you want to use, you can possibly purchase that. That's the basics of Roblox, but there are upwards of 15 million experiences on the platform, so if you end up interested in the company, I really suggest anyone to just go try it out.

Mary Long: You mentioned this difference between experience and gaming, and that points to the fact that, Roblox isn't just a gaming company. It's not just about games. It's also about creating their platform for developers. It's pretty essential to the idea of the company as a whole. How does that impact how you evaluate it?

Kirsten Guerra: I think it's critical to understand that, when you are logging on to Roblox, and you're choosing a game, you are playing a game not that Roblox created but that Roblox enabled its developers to create on its platform. Essentially what Roblox is doing here is to provide the Cloud infrastructure that hosts those games. They provide a physics engine, Roblox Studio, which is their game creation software, and in a way they provide their active network of millions upon millions of daily active users. They provide marketing and analytics tools, things that help get games in front of the right users that might be interested in them, and it helps developers understand the behavior of those users, helps them monetize better, all that good stuff. If you contrast that to the major publishers in the larger gaming world, think like in Electronic Arts or Take-Two, those publishers tend to own their own in-house game development studios. They will handle distribution and sales and marketing, and all of that stuff on their own, that's their expertise. But at the same time, they're fully taking on the financial risk of the games that are developed by those in-house studios. Roblox does not take on that risk. I think it's maybe easiest to think of, with the analogue and streaming video, you can think of like Netflix versus YouTube. Netflix is responsible for funding the development of content themselves, or sometimes they're just allocating capital toward purchasing exclusive streaming rights from other IP owners to show on their platform, but YouTube doesn't do any of that. Instead it enables everyday users to be the content creators, and they're just where those videos are hosted. By that comparison, Roblox is like the YouTube of gaming.

Mary Long: I know you're bullish on Roblox long-term, but let's play devil's advocate for a second. The stock is down about 63% from a high that it hit in late 2021 of about $134 a share. Quarterly revenues increased in that time, but the company is still unprofitable. Last fiscal year in 2021, it posted a net loss of 930 million, which had fallen a lot since the year prior when it had posted a net loss of about 500 million. How did we get here?

Kirsten Guerra: Roblox had a monster a couple of years in 2020 and 2021 in terms of bringing in new users to the platform. That also, of course, overlapped with the late 2021 media hype around the idea of the metaverse, largely driven from Facebook's Meta announcement. There was just a lot of fervor, a lot of froth in the market around this idea. But as it often happens in the hype cycle of new tech, that died down, but that doesn't mean that the fundamentals have necessarily gone away. I think if you look at the enterprise value to revenue ratio for this company, Roblox's reached around 42 for that multiple in mid-2021, and now it's only trading at around 8.5x, so 42 to 8.5x, a big drop there. As you said, revenue has only gone up since that 2021 share price peak. It's really just that multiplier off of revenue that has dramatically dropped. Multipliers are very often just an indicator of general sentiment, and that has certainly dropped here. I think the biggest thing that has affected Roblox, though there are many smaller nuances, of course the biggest thing is just that, that sentiment and that froth around the idea of the metaverse, at least for now I think has dropped off.

Mary Long: Investor sentiment might have dropped off, but user sentiment seems to only be going up. As of the second quarter of this year, Roblox has 65.5 million daily active users. But here's another but, about 45% of those users are under 13. I feel like this demographic question is something people often mention when talking about Roblox. Is the fact that so many users are relatively young, under 13, is that an asset or is that a pain point?

Kirsten Guerra: I think that it's both. It's a pain point for a number of reasons. I'll start there, and then we'll go positive. It can be a pain point because for one with such a young user base, there can be high cost to keeping those users safe, like high content moderation costs, that kind of thing. It's also a pain point in that older users spend more. While younger users certainly do spend on the platform, it would be nice if we could get even older users, as they spend more. Then also because advertising is a potential future growth lever for this company. Advertising to these much younger users under 13 feels quite a bit achier. If that does become more and more of a growth lever, it's nice to think that we're advertising more to the older audience, but to get into how it's an asset, I think I would just frame this as the kids know what's up. Kids tend to be very open to new experiences. I think that if you are 50 or 40 or even 30 years old listening to this podcast, this idea of this virtual gamified 3D gathering space, or a metaverse, if you will, it sounds like otherworldly, it sounds very foreign, but if you rewind even 15 years ago, that's when I joined Facebook as a teenager, and I can tell you that at that time, adults also did not get Facebook, but now we all get it. It's taken some time, but we are all there. It was similar to when Google first bought YouTube. It was very early days for YouTube. I think it was very easy to look at that and say, who would want to watch videos that some random person creates? Now we have the answer to that. It's me. I watch YouTube videos many hours per week. I think that's the opportunity a company like Roblox has ahead of it, and this really invested young user base is a great sign because they tend to be the ones that get these new ideas first.

Mary Long: Your point about advertising to younger kids is being icky, completely true. I had noticed in just doing some research about this, that Roblox flagged, just like a key partnership, Gucci. They had built out a Gucci garden as an immersive experience. The idea of immersive experiences in advertising is fascinating, but I couldn't help but thinking, really, you're advertising Gucci to young kids? That seems not connected. But so anyway, let's talk about this advertising bit for a bit. What is the status of that segment now, and talk to us a little bit more about what the company envisions that looking like in the future.

Kirsten Guerra: Today advertising is not a meaningful part of the business. They call it insignificant, or an insignificant contributor to their bookings, but just in August 2023, so one month ago as we record this, they said that advertising is now live in its early form. So we will start to see some effect of that. They said that 19% of the top 100 experiences, which I guess is a way of saying 19 of the top 100 have ad units, so they're very much in the early stages of building out the supply side of the advertising there, and demand certainly exceeds the supply today. For my thesis, I see advertising really is just icing on the cake for this company. The cake is growth in the user base. That daily active user metric, continuing to expand the network effect is really core to the thesis as I see it, but if they're able to do that, then I think the add-on effects of advertising aren't even really considered in the share price today because, as I said, it's not a meaningful contributor at all at this point. It is totally unproven, so I think that's fair. They are approaching it cautiously, and they're trying not to scare away or overwhelm this user base that has been using this platform with no ads, but there's a lot on the line here, so I think that they'll put a lot of energy into getting this right.

Mary Long: David Baszucki is Roblox's co-founder and CEO. He owns 100% of the Class B stock, which allows for 20 votes per share, and has just over 65% of the voting power for the company. How should investors think about the breakdown of this voting power? How should we think about Baszucki?

Kirsten Guerra: There's no way around it here. This is Dave's company. That can be a strength, or it can be a weakness for a single founder to have so much influence. I think it's really up to an individual investor to decide how reasonable you think the leader is and how much you agree with their vision of the company. For me I think it's very clear from the founding story and from the way Dave continues to talk about the company that he sees Roblox's singular purpose as doing everything they can to support the creators in what they're doing, that that's what they exist for, and everything from there just belongs to the creators. For me, because I agree with that, that that should be the sole focus, and everything stems from that, then my assessment of it is that I'm comfortable with him holding that much of the company, in fact, better him than me, but that is something that I think any individual investor has to decide. If anyone is trying to do that and wants to hear from him, one of the best places to go might be, he has a podcast called Roblox Tech Talks where he interviews his senior leaders. If you're interested, maybe something to look at.

Mary Long: Kirsten, before we go, out of those 15 million experiences, is there a favorite one that we should check out for ourselves?

Kirsten Guerra: I don't even like horror as a genre in general, but the game Doors I find to be very fun. It's very simplistic. The goal is just to, I think, get to 100 doors by the end of the game. I say that I'm unsure because I've never completed the game, but it's very simple. You have to get through there without dying. I have never done it, but it's very fun.

Mary Long: Sounds fascinating. Let us know if you ever make it to 100 doors. Until then, thanks for hanging out and for talking about Roblox. 

Kirsten Guerra: Thanks, Mary.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.