How is it possible that on the very day Apple announced record 4th quarter revenues of $ 78 billion Brand Finance announced that Apple’s brand value has dropped by 27% to $ 106 billion, and is no longer the world’s most valuable brand?
The answer is simple. Fourth quarter results are a backward looking measure of financial performance, over a very short run period, while brand valuation is a measure of long term future expectations. Brand valuations are based on a five year explicit future forecast and a much longer term perpetuity value. Brand valuations represent the net present value of expected brand earnings now and into the future.
The fact is that consensus equity analyst forecasts and other data sources suggest a weakening of future performance at Apple. There is no doubt that Apple remains a hugely valuable and impressive branded business. It would be wrong to write it off just because it is now the number two brand after Google. But its glory days seem to be coming to an end.
It is telling that the CFO was prominent in the media coverage, bragging about returning $ 15 billion to investors, bringing the total of dividends and buy backs to $ 200 billion. If the Trump administration reduces corporate tax rates Apple may repatriate over $ 100 billion from Ireland and make the total $ 300 billion. Yet Steve Jobs seemed proud of the fact that he didn’t do such things because growth opportunities were greater inside Apple than outside. Clearly that is no longer the view.
The big problem with Apple is its reliance on smartphone sales, where it is losing its edge to Android phones and the newly resurgent Asian competitors, including Huawei and Samsung. Even Nokia is making a return from the grave in association with FoxConn, the Chinese maker of Apple iPhones! Volume Sales of iPhones in China dropped over 25% last year and the Chinese President, no less, has made it clear he wants to see Chinese innovation from Chinese brands. Apple has historically commanded a volume share of about 30% in the mobile phone handset market but a 70% value share. It is a juicy target for all its many competitor brands.
In the past Apple was noted for its ground breaking innovations. Yet the recent results indicate an 8% drop in sales of iPods, iPads and Beats phones.
The much vaunted new innovations in TVs or elsewhere are not apparent. Unfortunately brands don’t exist in a vacuum. They add most value to businesses which are equally strong in other types of intellectual property. Companies that are rich in patents, know how, copyrights, human capital, customer and contractual rights use brands as a means of increasing and accelerating sales and profits. Apple has always done this but the innovation engine appears to have stalled. The great thing about brands is that even when other IP is in the doldrums the brand keeps sales flowing until new innovations come along, either organically or by acquisition. There are parallels with the pharmaceutical industry. Blockbuster drugs create excess profits until the patents run out and have to be replaced. Apple’s blockbuster drug is the iPhone but its rapidly running out of efficacy. As a consequence equity analyst forecasts, on which we base our valuations, have gone flat or negative for Apple, and our reduced brand valuation reflects that pessimism.
The debate over Apple illustrates why every company needs a brand valuation. We work with many companies large and small valuing their branded businesses, the strength of their brands and their contribution to the financial success of the business, as part of an ecosystem of other tangible and intangible assets.
This analysis is used for making many strategic decision such as determining investment priorities, corporate structure, expansion opportunities, licensing and joint ventures, tax planning and financial reporting to investors. In 2016 we surveyed over 100 investment analysts. 75% said that they wanted more information about the value of brands in the annual financial reporting cycle than they currently receive. The reasons for this requirement are obvious.
Last month Brand Finance hosted Sir David Tweedy, the formidable Chairman of the International Valuation Standards Council, who was previously the CEO of the International Accounting Standards Board, to speak about the future of brand valuation standards. He explained that before the IASB role he was the Technical Director of KPMG, where he was responsible for the very first brand value on balance sheet back in the 80s. Diageo acquired Smirnoff Vodka, which under the old conventions would have been booked as ‘goodwill’ in the balance sheet and progressively written off.
He endorsed its inclusion in the Diageo accounts as a separate brand asset with an indefinite useful life. He even inspired an iconic ad with the headline ‘I thought Accountancy was boring until I discovered Smirnoff’. He mentioned that he pioneered the use of Discounted Cash Flow valuation techniques to value brands under UK. Accounting and International accounting standards, and has strongly advocated the revaluation of all Intangible assets each year and their disclosure by public companies to aid investor decision making. He could have knocked me down with a feather, because I thought he came from the old school of accountants who disbelieve in Intangible assets and brands. Apple is a classic example which illustrates why it’s important to value brands in a forward looking context.
Just as we do inall the countries we operate in, we are now working on finalising the annual publication of Sri Lanka’s most valuable brands league table, which will shortly be published. We adopt the same principles of valuation as we do for the Global 500 here too, which we look forward to sharing with you.
(The writer is CEO, Brand Finance)