Let’s Talk About Asset-Lite Business Models and Why We Like Them
IP licensing is a profitable business and is a competitive differentiator.
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Ahead of its June-quarter earnings report this week, JPMorgan Chase JPM made other headlines as reports circulated that it is planning to start charging fees on financial technology companies for access to customer bank data. As we understand it from Fortune,
Under the plan, every time a consumer moves money from JPMorgan Chase to a crypto account or a third-party service like Robinhood, the bank could charge the data aggregators a fee. Crypto firms and fintechs typically use aggregators, like Plaid or MX, to access customer accounts at major financial institutions like JPMorgan Chase. Up to now, the banks have not charged the fintechs, but this may change. The aggregators are widely expected to pass the new fees onto their fintech customers, with some potentially transferring the costs to the consumer.
The lingering question is how much JPMorgan will charge? That answer will determine the impact on small fintech companies such as PayPal PYPL, Block XYZ, Robinhood HOOD, and others.
While some are lambasting JPMorgan as a toll collector, we see it as the company embracing what we would call an asset-lite business model as it looks for another way to monetize its customer base. Asset-lite business models have been defined in a few ways, including:
“… a business strategy where a startup either reduces its physical assets or purposely avoids bringing substantial assets onto its balance sheet. Instead, the company relies more on its core competencies, outsourcing, technology, and partnerships to deliver its products and services.”
That description lands companies like Uber UBER, Lyft LYFT, and DoorDash DASH in the asset-lite category because they don’t own the vehicles used to deliver their service. We can also add to the mix companies such as Qualcomm QCOM, Universal Display OLED, and InterDigital IDCC that have IP licensing businesses.
Between those two asset-lite categories, we prefer the IP licensing business model given the sky-high profit margins we tend to see with it. Case in point, Qualcomm’s QTL licensing business, which accounts for around 12.5% of total revenue, but with its operating margins near 70%, accounts for 25% of Qualcomm’s operating profit stream.
Because InterDigital is a research and development, and licensing company, its financial reporting does not include cost of goods sold, which means its cost structure is composed of operating expenses with a hefty R&D component. Still, as it has garnered more licensing wins across its wireless, video, AI, and related technologies IP portfolio, its operating margins have been north of 50%. While Universal Display only breaks out its reporting by revenue segments, it’s logical to think its Royalty and License Fee revenue is a high(er) margin business.
Much the way membership business models we like differentiate Costco COST and American Express AXP and insulate their profit streams from their competitors, we like the asset-lite business model at Qualcomm and Universal Display for similar reasons. As we look for new opportunities for the Bullpen and the Pro Portfolio, we’ll keep asset-lite business models in mind, but we’ll also want to be mindful of their end markets and the strength of their IP portfolios.
At the time of publication, TheStreet Pro Portfolio was long COST and AXP.
