Your P/E ratio is what? …forget innovating in businesses with a yield stock

5 02 2012

Chris van der Hoven wrote:
I recently commented on my enthusiasm for Amazon. What I didn’t mention is that in the last 6 years they have invested circa $20Bn on R&D. Their revenue has grown too – 2002 to 2008, they went from $4Bn to $20Bn and since then it has rocketed to over $50Bn. However, their stock has been hammered (intermittently) because, for example, since 2010 they’ve had 7 quarters of declining profits. Analysts have had them at a P/E of 98! Jeff Bezos has said publically… …that he looks for investments that have an immediate payback for the customer, but could take 5 – 7 years to payback for the company. Of course it helps if you generate big lumps of cash that you can use to take these bets (and afford to lose a couple to bag the big wins).

So, what some analysts have started to register is that if you took out the R&D investment the P/E ratio would improve to around 10. In other words, these are NOT yield stocks, they are growth stocks.

So, BEWARE if you are a newly minted and recruited Innovation Director with a mandate to ‘innovate’ a mature business to improve growth. Instead of tinkering to find the best bang-for-the-buck innovation dimensions internally, consider managing the expectations of investors who think of your business as a yield stock.

This mismatch of expectations and analytical (mis)understanding should be added to the education and reforms required to make the stock exchange eco-system work for investors and growth. Other items on the list (the elephant in the room) include short selling – an evil that I think should be banned as soon as politicians start to worry less about lobbying and more about leading.




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