The earnings season circus is in town! Who doesn’t enjoy the thrill and drama of corporate giants’ shares rising and falling on commentaries of financial analysts? This season’s main attraction is the downfall of mighty Amazon who yet again disappointed expectations of financial wizards. Headlines full of words like “meltdown” and “collapse” abound and the price of the stock dropped over 10% on the first trading day after the earnings call.
Investment analysis is not my area of expertise and the only reason I write about Amazon’s “investors” annoyance is because the company is the poster child for customer centricity, which is my area of expertise. Amazon missing earning targets two quarters in a row causes some people to question whether their customer centricity strategy conflicts with the profitability growth desired by the investment community.
I wrote before that customer centricity starts with a clear understanding of who are your best customers and why they choose to do business with you. Then you do whatever it takes to keep them, and get more customers like them PROFITABLY. The challenge is, it is not always possible to do both every quarter and one has to choose the target which aligns best with their overall business strategy. That does not mean the sacrifice of profitability on the altar of customer centricity. In the words of Jonathan Salem Baskin
I completely agree with Jonathan. I simply suggest that earning per share metric (EPS) is not the best financial metric for customer centric company, or for shareholders who are interested in a long term, sustainable growth of their investment.
Jeff Bezos famously stated in his letter to Amazon’s investors that “Take a long-term view, and the interests of customers and shareholders align”. I do not know Mr. Bezos personally, but I get the impression that he usually chooses his words very carefully. People, who trade company shares based on quarterly swings of EPS, cannot really be described with the word “shareholders”. They are better described as traders, which means their interests are not aligned with the long-term interests of company’s stakeholders – customers/employees/investors.
Personally, I think that any financial metric, as a data point, is an oversimplification which is dangerous for a sound investment or sound management decision making. The world is not likely to come to an end at 5PM EST on the day a company reports and provides guidance for the next quarter. A combination of financial and operational metric trends would be much more predictive of the future performance of a company than a short-term data points comparison. For example, in the Amazon case, trending of Cash Flow From Operations (OCF) vs changes in Customer Experience or Customer Satisfaction rates would help to focus attention on how well the company grows its customer base without losing its edge in delivery of superior customer experience. In other words, this would show the investor how well the company executes on its stated, long-term strategy.
Common denominators for measuring economic performance of multiple companies, that have very different business strategies, may be a very convenient tool for a day trader. However, for an investor or for a manager, it is a fool’s errand. Sometimes common denominators are just too common to be useful.
