stock-market-game1For publicly traded IP-rich companies, the correlation between the strength of an IP management and protection plan and stock price is obvious. The track record of the OT 300 pitted against the S&P 500 between 2006 and November 2008 shows this clearly.  The OT 300 outperformed the S&P 500 by just over 460 basis points. 

We keep talking about the absence of IP value from corporate balance sheets.  It just may be this absence, in fact, that tends to push such IP-rich companies’ stocks into price levels above the companies’ stated values using GAAP.  Generally, if the missing element from the balance sheet is IP, and if IP drives a company’s gross margins, the missing element is a valuable one and the company’s stock is actually more valuable than stated. 

For companies such as these, increasing stock value for shareholders begins with high quality IP, which is created by a well-executed business model (licensing program) and forceful legal protection.  It is inevitable that such a proactive position taken with regard to intellectual property will return higher gross margins.  After all, it is the respective intellectual property that creates competitive advantage, which in turn increases the returns in excess of costs, even if only by reducing costs (operating or transaction).  Thus, high quality IP, through strong protection, protects gross margins from depleting.  Of course, increasing gross margins means more profits (or lower costs), which leads to a higher cash value of the company, and therefore higher stock price.

This is a very simplified explanation for the correlation between protecting high-quality IP and keeping shareholders happy.  Nevertheless, the correlation is evident, especially for certain companies where 50% or more of the corporate value is allocated to intangible assets.  Simply applying for and receiving a patent does not ensure that the competitive advantage created by that patent will not be eroded.  A calculated proactive position is necessary to turn that patent into a high-quality patent, which in turn can increase stock performance, increasing access to investments and the opportunity to grow.

This entry was posted on Thursday, August 13th, 2009 at 7:36 am.
Categories: Investment Intelligence, Monetizing IP ~ by Ian McClure.

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