Amazon and IBM: Whoops!
By Rich Karlgaard, Forbes
“KNOW WHEN to hold ‘em. Know when to fold ‘em.” Thus sang Kenny Rogers in his 1978 hit, “The Gambler.” (If the song seems fresh, it’s because you can’t escape the Geico television ad that has Rogers lampooning his tune.)
Lesson of the song: Circumstances change. Good luck is bad luck when the loser draws a gun. Bad can be good, if you’re wise enough to drop out before you lose it all.
It was Amazon’s good luck that for years investors looked the other way at the company’s lack of profits. They bought the Amazon two-step: Free cash flow matters more than profits, and Amazon can slow down innovation and growth and turn on the profit tap anytime it wants. Got that?
But circumstances changed. Stocks became fully valued. Investors became more selective. Amazon’s growth slowed, and its free cash flow–at least for a quarter–disappeared. Until recently a company with $80 billion in revenue with a brilliant founder/CEO but no profits seemed like a cool thing. Until suddenly it didn’t. Amazon’s stock in 2014 is down 28%. Think about it: Amazon is now fighting a multifront war against the likes of Apple over devices, Google over cloud services, Alibaba and Wal-Mart over commerce, and FedEx and UPS over rapid delivery. And it’s doing so with a weak balance sheet and a negative cash flow. Not very cool!
Circumstances change. So must Amazon.
And now so must IBM –but for entirely different reasons. If Amazon pushed its plan of profitless growth too far, IBM did the opposite. For years under CEOs Sam Palmisano and Ginni Rometty IBM promised steady earnings growth, even in the face of declining sales. A quarter’s hiccup would be one thing, but IBM has had ten straight quarters of revenue decline. What IBM did to keep up earnings was buy back its stock–more than $100 billion worth since 2002–and sell off lower-margin businesses.
Keep reading: Amazon and IBM: Whoops!
And listen to this wise investing song:
