Strong brands are essential for companies to maintain market dominance, but accounting standards don’t always recognise their full value.
Last week, US energy drink company Celsius (US:CELH) published its annual report showing that revenue had more than doubled in the last year to $1.3bn (£1bn). In fact, since 2020 its sales have grown a ridiculous 914 per cent. The company sells itself on the fact it’s a sugar-free, healthier version of Red Bull or Monster Energy. Whether it is healthier is up for debate, but that doesn’t matter for investors, because the customers clearly believe it.
Similarly, it is not obvious that Apple’s iPhone is significantly better than Samsung's. However, the Apple brand has been proven to resonate more with its customers. There is even scientific evidence to back this up.
Michael Platt, director of the Wharton Neuroscience Initiative, conducted an experiment in which he looked at the brain activity of Apple and Samsung smartphone users. Using an MRI machine, he measured brain activity responses to news about the brands. In the case of Apple customers, when they read positive news about the company the same parts of the brain activated as would do when the participants received news about their family.
For Samsung users, there was no discernable response when they read a positive story about Samsung. However, in a display of schadenfreude, they did see a positive brain activity response when they read negative news about Apple.
Clearly, Apple influences people, whether they are conscious of it or not. This influence has been built by years of market penetration and billions of dollars of marketing spend, but unlike investing in a factory, this doesn’t appear on the balance sheet. Marketing is seen as an operating expense and can’t be capitalised like R&D or capex.
Still, that expenditure clearly adds long-term value. Last month, Apple was able to sell 200,000 Vision Pro headsets for $3,500 each. For reference, these cost more than five times Meta’s equivalent product.
Warren Buffett understands the importance of brands and it is why he has held a position in Coca-Cola for decades. In his recent annual shareholder letter, he praised the company again, highlighting that it managed to increase earnings and dividends last year despite inflation increasing its input costs. “When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable,” he wrote.
The odds that Celsius will prove to be as successful a business as Coca-Cola, one of the most global brands in the world, are low. What is certain is that Celsius’s brand value isn’t being fully captured by its balance sheet. Last year, it spent $160mn on advertising, up from $85mn in 2022 and $36.7mn in 2021. Now this investment is starting to pay off, with operating profit swinging from a prior-year loss of $158mn to a $266mn profit.
Balance sheet analysis and free cash flow models are important, but there are other factors to consider. If you find a brand that you like and it makes you feel connected to something beyond yourself, others may feel the same. In the long run, that warm feeling inside will make that company a lot of money.
