The Danger of Investing in the Future
Aug 1st 2012 10:27PM
Updated Aug 1st 2012 10:32PM
The phrase "investing in the future" is both socially moving and nonsensical (how would I invest in the past?), but its social meaning is very different from its financial meaning. In general society, it means that we're putting money toward making tomorrow better than today, usually by giving kids something. In finance, it usually means that a company isn't making money right now. As investors, we can choose to be excited about the future, or we can see it as a pipe dream.
One of the most common refrains from Amazon.com (NAS: AMZN) bulls is that the company is investing in the future. This is how we go about explaining why a company that had revenue of $12.8 billion only made $7 million in net income. One of the reasons bulls are so comfortable talking about the future is that Jeff Bezos has generally done a good job of making the future fit his vision. The Kindle laid the path for all e-readers, and no one would deny that Amazon led the way in making the Internet a global place of business.
But the bull case is largely based on Bezos' ability to continue repeating the performances he's had in the past. Other companies, such as Facebook (NAS: FB) , haven't earned that trust from investors. It seems no one believes in Mark Zuckerberg, or they don't believe in him the same way they believe in Bezos. That might explain why Facebook's investment in the future and subsequent earnings drop were so harshly punished. Following a less than stellar earnings report last week, the stock dropped like a stone.
The older guard
Most retail companies outside the Internet sector make smaller, more paced investments in the future. While these eat into the bottom line, they usually do it in a much lighter way. Jeans retailer Buckle (NYS: BKE) is one of my current favorites in the "good growing speed" category. The company is expanding its retail presence at a nice, even pace. Last year, the company opened only a net 11 new stores, and while revenue increased 12%, property and equipment purchases actually dropped 33%. Because it's growing at such a measured pace, investors don't have to have a trust-fall sense of faith in management.
Buckle still talks about the future, but it talks in much more concrete ways. Whereas Amazon talks about how "Amazonians are leaning into the future, with radical and transformational innovations," Buckle simply wants to "continue doing what [it does] best -- creating the best possible shopping experience for our guests."
In the middle
There is always middle ground. Google (NAS: GOOG) has gone through its heaviest round of "trust us" and has now moved into a much clearer investment strategy. However, it's still a growing Internet company, so a bit of trust remains. Last quarter, the tech giant increased revenue 35%, but unlike Amazon, net income also rose 11%.
Google has expanded its offerings recently but has maintained its core competency of selling advertising. Amazon continues to reinvent the way it sells its products and services, moving from book seller, to everything seller, to e-books, to cloud computing over its lifetime. Google's biggest push recently has come in the form of its new Nexus 7 tablet, which hasn't drained resources too deeply.
The bottom line
The takeaway from all of this is not that investing in future growth is better or worse than investing in the existing model; it's simply that it's important to know what you're buying. When you invest in Buckle, you're investing in a company that has a clear plan, but that isn't going to suddenly double in value. You don't have to trust that the management team can redefine the brand every three years.
With Amazon, you need to have a lot more faith in the folks at the top of the chain. If you're comfortable trusting them, then it can be a great place to hunt that growth. Facebook is clearly the biggest risk here. Very few people trust Zuckerberg, and the nightmare of an IPO didn't help. The Fool has a new premium report on Facebook, though. It explains where the company's going, what it needs to do to get on track, and what investors should be looking for. We'll have updates throughout the year, but get your copy now to get the early look.
The article The Danger of Investing in the Future originally appeared on Fool.com.Fool contributor Andrew Marder owns no stocks mentioned in this article. But he really likes Buckle. The Motley Fool owns shares of Buckle, Google, Facebook, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Facebook, Google, Buckle, and Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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