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If you look back at the 1950s, a change in a company’s reported earnings would account for 80-90% of the change in the company’s market value (this data is taken from The End of Accounting by Baruch Lev and Feng Gu). However, a company’s financial information has become less predictive of a company’s stock price in recent years.
In the early 2010s, you can explain only 50% of market cap variation by pointing to financial information reports. Why is this the case? It’s because many companies have intangible assets—such as branding and software development—that aren’t captured by their financial information.
Financial reports are designed to provide insights on a company’s material investments (like opening a new factory). They don’t capture, for example, the lifetime value of a $200K investment in software development. To better understand why this is the case, check out this helpful analysis of The End of Accounting in Napkin Math by Adam Keesling.
What this means for you as an investor is that you need to think not only about a company’s financial information but about the value of their intangible assets when making an investment decision (i.e. what is this company’s brand worth? How valuable are the network effects of a hundred thousand users?).
When you check out the 87 companies on StartEngine, think about what intangible assets they bring to the table.
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Fluz | Continued Growth
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Como Audio | DTC Sales Growth
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Piestro | New Advisor
Piestro welcomed Jeffrey Kalt as an advisor. Jeffrey is the CEO of CaliBurger, and was formerly a Co-Founder of Kitchen United, a cloud kitchen company that raised $50M.