West888

“Wow could you get any further short innovation? These companies are the three bright spots on a very beleaguered economy. Companies that are actually hiring 20% a year. Companies that are investing in communities, building campuses, attracting talent. So your investment thesis is that you don’t like the current quarter results for companies with revenue growth over 30%? How does it look when you take a 20 quarter view? Do the numbers on the companies work then, when the growth subsides and the companies reach a reasonable market penetration like $10 billion a year?”

29 Sep, 11:03 AM!
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Hedgephone Comments (901)

“innovation” — such an over used buzzword. I call it shorting mania and buying panic…

Netflix is a perfect example of when “innovation” meets reality and valuation….

Valuation met innovation in a dark alley, and valuation beat the piss out of innovation… I’ll take valuation over “innovation” any day of the week.

29 Sep, 11:18 AM! Report Abuse0

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westwest888 Comments (38)

“So you should invest in things you know, like paper. Scott’s makes the same amount of paper every quarter, they pay a nice dividend, and you can take your money and put it in 10 year treasuries at 1% or find other investment opportunities with it. I think a paper company is not growing and owes it to their shareholders to give them their money back over time.

I don’t understand how YOU would run those companies to maximize shareholder value. Let’s presume if you didn’t invest in R&D you could return a 20% after tax profit. Do you really want that money back in this investment climate? Or would you like a bunch of really smart people to write more software, invent new services, and build out new infrastructure? Who would liquidate when you have momentum?

NFLX sells a product for under $10 with no contracts to consumers. Two of the companies you listed above have lots of enterprise customers on multi year deals with support and customization. Every 3 months they get an email that new features have been added no extra charge, so they’re happy.”

29 Sep, 12:02 PM! Report Abuse0
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Hedgephone Comments (901)

Hi West,

I think the important point to note is that my articles on short selling aren’t shorting the business but merely the stock.

I agree with you that growing a business for the long term is the goal of any corporation for the maximization of shareholder wealth is the ultimate goal of any legitimate CEO.

That said, there are environments where the paper CEO should return maximum cash to shareholders if, for example, that company sees bad times ahead and slowing sales volumes. In that particular case, paying out a large one time dividend and liquidating the firm would make a good deal of sense if the shares of the firm were undervaluing the assets on hand.

If the shares were markedly overvalued from a liquidation perspective, the company should issue stock or sell the company. Of course, valuing any business is more art than science but mainly I agree that spending on innovation makes a good deal of sense depending on future business prospects, the economic backdrop, and competitive forces.

So in all, I am not saying that an overvalued firm is making a mistake in spending money in R&D, but if I were a stockholder I would prefer the company to issue shares at an overvalued level to pay for that R&D or to sell the company at an inflated price to maximize value.

The reason issuing shares to fuel growth makes sense for an overvalued business is that the capital can be used to acquire undervalued assets, boost R&D spend, pay dividends, or generally shore up the balance sheet to “catch up” to the market valuation…

In all, I see nothing wrong with the way these businesses are operated. I am simply looking at the macro picture and trying my best to find issues that the general public, who is by and large half educated and too trusting, will overpay for in the stock market.

When things get ugly is when the managements of overvalued companies try to defend their stock valuations (ala a certain http://bit.ly/89UJPz poster/CEO who will go unnamed) and advertise their future prospects to investors when they know deep down that growth expectations for the business are simply too high.

LinkedIn is an example of this in that the stock is markedly overvalued yet the CEO is making TV appearances, the President speaks at their HQ, etc… When government starts getting involved in touting overvalued investments you get the dual risk of fascism and the rage of the common man who loses money on said equity and winds up blaming capitalism instead of the collectivism or socialistic agenda that such a move was intended to deliver.

While I believe these companies are innovative and are driving “good” things in the capitalistic market as far as profits for their management teams, I feel they should all issue a ton of stock and use that cash to employ the R&D teams as you suggest. While this may not be good for existing shareholders in the short run, it will cool off the bubble for the shares and will create longer term value for the stockholders in aggregate. In other words, for these tech firms, the 20% going to R&D is better but a manager better serves shareholders by spending this money from a share issuance than from organic earnings when a stock is 50-75% overvalued as I feel all of these admittedly “innovative” firms are at present.

Just remember, ten years from now there will be a whole new set of innovative businesses and industries and at the heart of every business endeavor their is always disruptive change and new business models creating innovation. In other words, from the investors perspective finding low risk high uncertainty opportunities in your Scott’s paper example may be a better investment than a high risk high return investment in a bear market — bubbles tend to pop and people get hurt badly when they do. Better to take your medicine and issue stock down to the sleeping point so that over the long run your shareholders retain their capital