Valuing Amazon (Part 1): The Problem of Intangible Assets, ROIC and RONIC (Tech Strategy – Daily Article)

Key take-aways for this article:

  • The key to valuation is estimating growth, ROIC and RONIC.
  • This is difficult for digital companies because of the opacity of intangible assets and investments.
  • In Part 2, I will give you frameworks for taking apart intangible assets in digital companies.


I am in Kuala Lumpur this week, writing a book and doing a visa run. And working on valuing Amazon, which is the company being taken apart by the subscriber group right now.

Amazon’s ecommerce business and AWS are competitive fortresses. They’re on my short list for the strongest digital businesses. And I’ve been waiting for prices to fall for years, which is finally happening.

So, I’m trying to figure out a reasonable valuation for the company. I’m mostly a digital strategy, which means figuring out who is going to win. But I do do some valuation, but not professionally. I recently did a valuation for Microsoft, another competitive fortress. That is located here.

As mentioned, my approach to analyzing digital businesses is pretty simple.

  • I do a qualitative assessment. I look at competitive strengths and customer behavior mostly. This usually takes me several hours for a complicated business. I’ve done files like this on +500(?) companies.
  • I then separate the business into “bird in the hand” vs. “bird in the bush”. What is the value today? What exists? What is the new value coming in the future? How predictable is this?
  • What is the overall valuation and how will it change over time?

And that last one is the difficult question.

How is the value of the business going to change?

People usually think mostly in terms of growth for this, which is definitely part of it. But future value creation follows from growth and the returns on capital for that growth. An example:

  • Company A has a factory with an invested capital of $8M. And it generates $1M in operating profits (post tax). So, the return on invested capital (ROIC) is around 12.5%.
  • However, the company is also building a new factory for $10M, which will increase operating profits (post tax) by $2M. So, the return on new invested capital (RONIC) is around 20%.

Now compare that to:

  • Company B has a factory with an invested capital of $5M, generating $1M in operating profits (post tax). So, a ROIC of 20%, which is substantially higher.
  • And the company is building a new factory for $10M, which will increase operating profits (post tax) by $1M. So, the RONIC for this company which is 10%, which is much less.

So which company is more valuable today? In the future?

Company A creates less value now (bird in the hand) but will, in theory, create more in the future (bird in the bush). Company B is the opposite.

Earlier this year, I did a podcast on Return on Invested Capital (ROIC) vs. Return on New Invested Capital (RONIC). There is more available on this there.

Here’s the problem. This all becomes really difficult when you go from building new factories to building new intangible assets like software and intellectual property.

And that brings me to the topic for today, which is intangible assets. Or more accurately intangible capital.

Why Growth, ROIC and RONIC Are Pretty Easy for Starbucks

Let’s switch back to tangible assets (i.e., tangible capital) for a moment.

For Starbucks retail outlets, valuation is pretty easy. We can project the same store sales growth of the existing stores. And we can estimate how many new stores they will open (and their traffic). Like the factory example, we get a nice clear picture of value creation today (the existing stores at current volumes) and future value creation (new stores plus new sales at existing stores).

We then need to estimate how much capital this will cost. Which mostly means building and maintaining lots of tangible assets (i.e., the new stores and their inventory).

So, we look on the balance sheet and at the capex spending – and we actually get a pretty clear picture of how much capital we need. We can see a nice breakdown on the balance sheet. We see PP&E (gross and net), and depreciation. We can see land costs. We can see inventory costs. Now in practice, we probably need to capitalize leases and some R&D, but you get the idea. We have a pretty nice breakdown of the tangible assets that exist now and that are required for growth.

Estimating the invested capital is pretty close to doing a reproduction valuation. And there are two ways of doing this for various assets. But you basically use the market value of the asset or the cost (i.e., what was paid minus depreciation). Factories and machinery are usually taken at their cost and then depreciated. But land is usually taken at its current market value. If someone dramatically overpays for a Starbucks location, that doesn’t mean the business has a lower RONIC. It just means they paid too much. You want the ROIC and RONIC to represent the true economics of the business.

What is also great about Starbucks outlets is there is a clear demarcation between new and old stores. And between new and old invested capital. And between ROIC and RONIC (somewhat). The existing stores can be seen mostly as a return on existing capital. The return on the new stores is return on new invested capital. And these can be wildly different. If Starbucks is opening its new stores in Mexico, they will have a very different RONIC than existing stores in the USA.

Anyways, my point is this is all very understandable when you think in terms of tangible assets.

Why Growth, ROIC and RONIC Are Difficult for Star Wars Films

Try to do the same exercise with the films and television shows for the Star Wars franchise. It gets really fuzzy real fast.

We can estimate future revenue for the existing films. But then it’s tricky to figure out operating profits because there is almost no visibility into the numerous contracts involved. We don’t know the costs and profit-sharing agreements in the many contracts.

The other big problem is the invested capital. This is not about tangible assets like stores. This is about intellectual property. Star Wars is 100% in the intangible assets business (i.e., intellectual property). How do you assess the intangible capital of the existing films and tv shows?

We can start by looking at the money spent to make the existing movies and television shows. But do we just take what was spent (i.e., the cost)? And how do we depreciate / amortize that? And what if they overpaid?

Instead, do we take the current market value, like with land? How do we estimate that?

And are the existing movies the only intangible assets that matter? Isn’t the created fan base a big asset? Millions of people loved Star Wars up until recently. How do we calculate that as intangible capital?

And the balance sheet is no help. Unlike the breakdown of past spending we had for Starbucks, there is next to nothing for intangible assets on the balance sheet. We know what Disney spent to acquire Star Wars. We know what movies generally cost to make. But these are all back of the envelope numbers.

And then how do we figure out current versus future value creation for Star Wars? What past versus future invested capital? And ROIC vs. RONIC?

There isn’t as much of a clear demarcation of past and future spend with intangible assets. It’s not like existing versus new stores. It all mixes together. Plus, creative projects are unpredictable. If you spend ten times as much as was spent on the band U2, you don’t get ten groups like U2. Certain intangible assets like software scale nicely with additional spending. Others, like creative projects, are unpredictable.


Ok. That was a bit tedious. But I wanted to paint you to extreme examples of ROIC vs. RONIC. And of current vs. future value creation.

In Between Starbucks and Star Wars, We Have Amazon

  • There are big parts of Amazon’s ecommerce business in physical products (not entertainment) that are like Starbucks. We have lots of warehouses, trucks, and inventory (i.e., tangible assets). And growth means opening new warehouses, which is fairly predictable.

Photo by Adrian Sulyok on Unsplash

  • But there are other aspects that are predictable intangible assets. There is software development, lots of R&D, new services and customer experiences, and a large loyal customer base.

Photo by Loewe Technology on Unsplash

  • And then there are unpredictable intangible assets, like creating new television shows and movies.

Photo by Thibault Penin on Unsplash

And then there is AWS, which is an entirely different animal.

The problem with valuing Amazon is the myriad of intangible assets.

So I’ll give you the framework I use for this. But I think this is already a lot of theory for today. That will be in Part 2.

Cheers from Kuala Lumpur, Jeff


Related articles:

From the Concept Library, concepts for this article are:

  • Intangible assets
  • Valuation (Ques 3): Growth, ROIC and RONIC
  • Valuation: Digital Valuation

From the Company Library, companies for this article are:

  • Amazon

Photo by Christian Wiediger on Unsplash


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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