Communicating the Value of Your Intellectual Property to Wall Street
Rose, Chris, Cronin, John, Schwartz, Rachael, Research-Technology Management
A properly-constructed IP story can benefit a company and its stockholders.
OVERVIEW: Companies and their shareholders stand to benefit from consistently developing and promoting their intellectual property portfolios with a structured IP story. An IP story shows how a company developed IP that supports important products and technologies, with clear linkages from the market opportunities to patents. Companies that follow this approach stand to 1) support higher stock prices, given the incredibly high value placed on intangibles in today's market, 2) maximize return on investment in their IP by supporting strategic technologies that are linked to market needs, and 3) lead the corporate world with best-in-class IP management.
KEY CONCEPTS: intangible assets, intellectual property, intellectual asset management, corporate valuation.
Many companies may be undervalued on Wall Street because research analysts do not factor the true value of intellectual assets into their assessment of these firms. Over the last three decades, intangible assets have ballooned to approximately 85 percent of the S&P 500's value, up from 38 percent in 1982 (1,2). Because intellectual assets represent such a significant portion of a company's worth and, typically, intellectual property (IP) comprises the largest part of those intellectual assets, it is important that a company communicate the importance and value of IP to analysts, shareholders and potential investors. However, most companies have neither internal processes for identifying the most valuable patents in their portfolio nor an expertise in communicating the value of their IP to Wall Street.
How are stocks valued? For the most part, a company's stock price is determined by how investors and analysts believe the company will perform in the future. Value investing, one common way to select stocks, involves the review of financial ratios of comparable firms to find companies whose ratios hint at future success. Often, these ratios do not account for the strengths or weaknesses of IP. A company that uses IP in a strategic way will increase its likelihood of future success, and thus should use its IP strengths to positively impact stock prices.
It is important to recognize that IP can be directly linked to the future success and revenues of a company. When utilized effectively, IP can provide:
* A unique competitive advantage, which allows the company to secure a market and gain significant market share.
* Significant licensing revenue, both within a company's core markets and in ancillary markets.
* A stronger negotiating position, which allows the company to secure stronger contracts with suppliers, customers and partners.
Companies can impact their stock prices positively by first synchronizing their IP to their business goals and, subsequently, by communicating the processes utilized to protect their most valuable current and future products. For example, Color Kinetics Incorporated (an ipCapital Group client) develops solid-state lighting systems. The company has spent considerable time and resources to develop a sizable patent estate that consists of about 50 patents and 150 pending applications in its technology space. Color Kinetics' having done this work to build the estate is good, but what is better is that it consistently promotes the breadth and strength of its IP portfolio to analysts and the public. This message is sinking in. For example:
* Analysts who cover the company have mentioned IP matters as drivers for the ratings of Color Kinetics stock (3).
* Many profiles of Color Kinetics mention its IP strategy in their corporate overviews (4,5).
Color Kinetics' emphasis on communicating the value of its IP and IP strategy (along with solid financial performance) seems to be working. Since its IPO in mid-2004, the stock price is up about 70 percent, while the overall NASDAQ has been fairly flat (6). …