Continuing with our recasting of intangible investments for Semrush SEMR 16.10 +0.36 +2.29%, we are now up to calculating amortization for the assumed investment levels of S&M, G&A, and R&D.

Here are the assumptions: the useful life/amortization period of each investment is 5 years (again, more on this assumption later), and the start year for accumulating each of these expenses as an asset was 2014 (for SEMR I didn’t have any numbers before that year).

Here is the result:

A few things to note. The amortization amount for each year ties out to the amortization expense in the adjusted income statement from the prior post. Now we can see how much each investment category contributed to the total amortization item. We can also see that the biggest contributor to intangible investment and amortization is S&M, of course because this is the biggest expense for the company. To put things in perspective, note that the total asset amount from SEMR’s 2022 balance sheet (including a lot of cash and ST Investments) was about $300mm – so we have essentially doubled the asset base by capitalizing intangibles per our assumptions, and most of that is S&M.

Adjusted ROIC For SEMR

We now have adjusted NOPAT and invested capital – the numbers we need for the numerator and denominator to get to adjusted ROIC. Below is a summary of where we end up – first in a graph, and then the backup numbers:

Given that Semrush’s goodwill level is negligible, looking at ROIC with or without goodwill doesn’t change the numbers much: these are good returns – well in excess of whatever one assumes for the company’s cost of capital. It’s interesting to note that the ROIC actually went down from 2021 to 2022. The company substantially increases its spending, and based on the assumptions we are using, while they grew sales nicely Y/Y, the bang-per-buck on their investment actually went down. Economists would say a company should keep investing – even when incremental ROIC is declining – as long as the ROIC exceeds the cost of capital. That is true, but the decline is something to think about and dig into, at the very least. I would break down what has changed Y/Y in the ROIC ratio – is the decline coming from sales growth or margins? Or is it that investment is just going up so much, and if so how much of that is working capital vs. tangible or intangible asset investment? I will get into that kind of thing with future examples – for now, I just want to nail down the basic steps of intangible investment recasting.

I think the bottom line here is that, from an ROIC standpoint, Semrush as an investment is worth a good look. One has to buy into the relationship between investments in S&M and subscription revenue and the durability of that relationship (i.e., future LTV/CAC, the sales funnel’s continued effectiveness, selling via a salesforce of people which has different economics vs., the funnel, the TAM…) and be comfortable with the valuation, but it seems to be worth the effort, especially because SEMR generates cash and has a very strong balance sheet. This business is not a tech concept stock, and it is going to be around for a while.

Here’s the excel workbook for the numbers used in the last 3 posts on SEMR You can expand and view the entire workbook simply by clicking on the stacked windows icon in the bottom right.

Please email me with questions/comments/errors related to this post!