Justin Fox has a great little post called “How Amazon Trained Its Investors to Behave”:
When Amazon reports below-consensus earnings, as it did Tuesday, and the share price jumps, as it did after-hours Tuesday and again Wednesday morning, the reaction isn’t quite the puzzle it seems. Slate’s Matthew Yglesias cracked that “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.” But what’s really going on is that Jeff Bezos has trained elements of the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off, not signs of trouble.
The weird thing here is the Jeff Bezos training regimen, when it comes to shareholders, is really no different to the Mark Zuckerberg training regimen, or the Steve Jobs training regimen, or even for that matter the Jimmy Dolan training regimen, of Cablevision infamy. In each case the CEO treats his shareholders exactly the same way: disdainfully, by ignoring them. And it turns out that investors, in turn, react in very different ways, depending on the CEO and the company which is doing the ignoring.
Fortune’s Philip Elmer-DeWitt has a good overview of what he calls the “bizarro valuations” of Apple and Amazon, and how it makes very little sense that Apple is selling for 10 times earnings even as Amazon is selling for more than 3,000 times earnings. On the other hand, who cares about such things, beyond stock-market speculators? The one thing that Jeff Bezos and Tim Cook have zero control over is their own stock price; they’re focused instead on the things they can control. Indeed, they probably have much more control over their companies than the vast majority of other CEOs.
Or, to put it another way, both Bezos and Cook are secure enough in their jobs (unusually, for CEOs these days) that they can afford to ignore what investors think, most of the time. Neither is acquiring companies with stock, or otherwise in need of a high stock price, and neither is going to get fired by their board. It’s fascinating to see how an almost-identical attitude towards investors, at two companies which have grown to dominate their respective markets, has resulted in such widely differing valuations.
Which leaves the question: does the stock price matter at all, to Bezos or Cook or Zuckerberg or any other CEO of that ilk? The answer is yes, for one big reason: talent acquisition and retention. If you’re running a tech company, you’re going to be handing out a lot of equity as part of your compensation packages, which mean that your employees are highly interested in seeing the share price rise — a lot. When it’s rising, they’re happy; when it’s falling, they’re not. And so even if you don’t give two hoots about your institutional shareholders, you still have to care about that share price.
That said, while “rising” is always good, in terms of the share price, “stratospheric” is less so. If you’re Jeff Bezos or Mark Zuckerberg, handing out RSUs, it’s pretty hard to make the case that you have a huge amount of upside — just because the share price is already so expensive, and your company is already so fully valued. At Apple, by contrast, the upside is still enormous, and if the team continues to deliver amazing growth figures, then the share price will eventually rise a very great deal.
Amazon and Apple and Facebook are large and pretty mature companies at this point: hires have job security as well as stock-related upside. But they all need talented engineers, and in a weird way it’s the company trading on the lowest multiples which is the most attractive in that respect. Apple’s low current share price could even be a competitive advantage, in the all-important war for talent.