January 30, 2015

Long live CAPEX!

In its customary aim to appease readers the media loves to mock the notion that “corporations are people too”. Well I have to differ, not surprising, but not in way that might be assumed. My perspective is of the corporation as an entity, which lives and dies on its financial health fed by people who contribute to its success and to people who consume its output. And while so much can be said about our culture and its embrace of capitalism, the truth, as I see it is in that consumption has been the historic fuel of economic growth. And in that regard the consumption, or expenditures, of corporations on their products, their people and their communities are just like people, especially Americans, who like to buy stuff. Therefore the next time you seen the acronym ‘CAPEX’ or capital expenditures, that company just might be doing the right thing.

One of the most interesting developments of the past 20 years of economic growth led by technology has been the number of companies that engage in what I call excess CAPEX. Namely, the pursuit of changing the existing world which requires the average geek to return to the drawing board, over and over again. Amazon (AMZN) the e-commerce company, is one of more familiar companies that is often assailed by industry analysts as practically reckless in its spending of nearly all available revenue. This is especially offensive to the older analysts who believe that companies can spend as much as they like as long as they return something back to the investor (shareholders) either in their stocks growth or in the form of a dividend. Amazon has built an empire as first a bookseller, than a music seller, than a seller of nearly everything else and thereby making it every type of retail business rolled into one internet juggernaut. Great, right? Maybe. Over the years the massive amounts of revenue that have been generated have been plowed into food trucks, phones, drones and media productions, while taking on nearly every industry from auto production to space exploration. Other companies such as Google (GOOGL) which we all know generates massive revenue from selling ads on its search platform. The real surprise is instead of precious dividends to the patient shareholders the company invests in cute, but less than promising endeavors such as Google Glass, Driverless Cars and Robots (I do like Robots though). At the same time it has the audacity to give away its operating system for cell phones called DROID in return for the data it needs to sell to advertisers. And I won’t even go into Facebook (FB) the social networking website company who gives even less back to the shareholders in favor of eye watering expensive investments (i.e. $19 billion) in companies that probably no one over 16 years old has ever heard of.

But I believe the founders and managers of these companies do have a vision. Jeff Bezos’s tried everything he can think of and can put up with the cost, and I respect that. Probabilities suggest that he and Sergey Brin and Larry Page of Google or Mark Zuckerberg (age 30) of Facebook have the time to eventually hit on the next big thing. And whether they can manage the inevitable growth and the global political and regulatory interference that comes with their industry the shareholders will decide if the stock grows exponentially to their vision. If not, than like Apple (APPL) and Microsoft (MSFT) before them they will eventually declare a dividend to reassure the shareholders who are often loyal consumers of their products. And loyalty should always be rewarded even if it’s not the economic behavior we’re used to. I for one am having a blast finding out.  Long live the consumer, long live CAPEX!