Facebook Is Doing Exactly What It Should Be Doing - Ignoring Wall Street and Investing for the Long Term

A funny thing seems to have happened to Facebook's management since the notorious IPO face plant: they're making a lot of smart choices. Quietly.

Instead of displaying arrogant disregard for almost everyone not themselves, alienating customers and disappointing believers, they appear to have embraced a series of sensible strategic initiatives that may well pay off in terms of long term growth against determined, well-funded and equally intelligent competition. How did this happen?

The first of these steps was getting over themselves. The IPO wasnt just embarrassing, it was humiliating: their competence was questioned, but more devastating for these Harvard, MIT and Stanford products was the challenge to their intelligence. If you're so smart, the whispers went, where are your revenues and profits? Ooops.

So, in looking around for models, the Facebook gang abandoned Apple, with its aloof iconoclasm, which many argued had been Mark Zuckerberg's original inspiration, and, instead, chose not Google with its geeky omnivorousness, but Amazon.  A brilliant choice, because CEO Jeff Bezos has consistently defied Wall Street's insatiable demand for instantaneous, ever-rising and unsustainable profit growth for reinvestment in the business to grow it for the long term.The focus on mobile, to which FB was late, is now paying dividends and the financials reflect that.

In addition, Zuck has pulled back and let COO Sheryl Sandberg catch most of the public attention. Zuckerberg is a divisive figure. He may turn out to be a successful as some of his predecessors like Bill Gates, Michael Dell and, of course, Steve (no last name necessary). But like all of them, the early going is a bit rough and needs refinement. Sandberg, and her controversial book, Lean In, reminded all and sundry that for all its brash insensitivity, Facebook had arguably one of the two most powerful women in tech, and possibly in American business.

There are other examples of the company's newly found maturity but the larger point is that the company does appear to be listening, watching, learning . It's a start. JL

Henry Blodget comments in Business Insider:

Facebook is doing exactly what it should be doing.
It is striving to create the most possible long-term value for its four important constituencies: Customers (users), employees, shareholders, and society.

In short, it is doing what many more American companies should be doing:
Investing for the long term, without worrying about the short-term impact on the bottom line.
A company investing aggressively at the expense of short-term profit shouldn't be news. It should be what all companies do.
Alas, it's so rare these days that it qualifies as downright startling.
Most American companies and management teams have become so hijacked by short-term Wall Street traders, and so obsessed with their annual bonuses and stock prices, that they think about little more than "beating analysts' estimates" quarter after quarter.
In so doing, they often under-invest in opportunities that could create vastly more value over the long term.
Instead of making big, bold bets on projects that won't pay off for 5-7 years, for example, companies cut research and development to squeeze out a couple more pennies for this quarter's bottom line.
Instead of investing in redeploying and retraining talented employees, they fire them.
Instead of paying good employees well enough that the employees don't have to dedicate their working lives to enriching the company and yet still be poor, they "control labor costs." (Hello, Walmart. Hello, Starbucks and McDonald's. Hello, Apple Stores (although these, to Apple's great credit, do pay more than they have to)).
And so on.

Business Insider, St. Louis Fed

Big American companies now have the highest profit margins in history.

As the charts below show, the obsession of American corporations and managements with short-term profits has led to the country's biggest companies earning the highest profits in history, both in absolute terms and as a percent of the economy. Meanwhile, the companies are paying the lowest wages in history.
And the companies are investing in capital equipment at one of the lowest rates in history.

Business Insider, St. Louis Fed

Big American companies are also paying the lowest wages in history--that's why their profits are so high.

If you talk to companies about this, they will say they are obsessing about short-term profits and under-investing in the future because they have a "duty to shareholders" to deliver the highest financial return and highest stock-price possible, at all times. Importantly, however, the companies do not say this because it's some immutable law of business.
It isn't.
The companies say it because it's what they've been told by short-sighted but loud Wall Street fund managers, who are worried about how their funds are going to perform week, next month, and next quarter.
These fund managers do not worry about how their funds will do over the next 5-10 years or what kinds of value the money they are investing is being used to create. Because that's not what they're hired or paid to do.

Business Insider, St. Louis Fed

Big American companies are investing at one of the lowest rates in history. (Capital investment to GDP)

The Wall Street investors are obsessed with short-term performance because investors in Wall Street funds have become obsessed with short-term performance: If a manager has a bad quarter, the fund's owners begin to grumble and gripe. If the manager has a bad year, the fund's owners start looking for new funds. If the manager has a few bad years, it's time to start looking for another job or career.
Never mind that market cycles aren't measured in "quarters"--they last anywhere from a few years to decades. And never mind that the absolute worst way to invest is to "chase" the latest hot trend of the past few years. (This leads to you buying at the top and selling at the bottom.)
There are lots of causes of the Wall Street Industrial Complex's myopic obsession with short-term profits, so it's not worth trying to pin the blame on any one participant.
The important point is this:
The short-term profit obsession is hurting companies, hurting average Americans, and hurting the economy.
Why?
Because the "cost-savings" that companies get when they don't invest in attractive long-term projects represent lost wages for American consumers and lost sales for other American companies.
And those lost wages and lost sales constrain the economy's growth rate.
In other words, because everyone is obsessed with "efficiency" and "maximized short-term profits," the economy is suffering through very high unemployment and slow growth. And this high unemployment and slow growth, importantly, is a direct result of companies' refusal to invest aggressively in the future.
That brings us back to Facebook.
Over the last few quarters, to Wall Street's dismay, Facebook has announced that it was going to reduce its profits by investing aggressively for the long term.
As a result, Facebook's earnings per share did not grow in the first quarter.
As a result, Facebook's stock is probably trading at a modestly lower level than it might be if Facebook had radically "cut costs" or reduced investment to produce the "highest possible earnings per share."
Critically, however, by making these aggressive investments, Facebook is setting itself up to have a great run over the next 5-10 years. And it is setting itself up to be worth more in 5-10 years than it would be if it fretted about this quarter's earnings.
In other words, instead of worrying about getting yelled at by a few fund managers who couldn't care less about Facebook's long-term value creation, Facebook is building its business for the long term.
Thanks to this aggressive investment, over the long-term, Facebook (and Facebook stock) will likely be worth much more than it would be if Facebook had instead kowtowed to today's myopic fund managers.
And, in the meantime, Facebook's aggressive investment is pumping cash back into the economy in the form of wages and the purchase of equipment and services from other companies.
That last trend is not just good for Facebook. It's good for the global economy.
So we should all tip our hats to Facebook.
The other company that has always invested for the long term no matter how loudly Wall Street screams, of course, is Amazon.
For the past 15 years, investors and the press have never stopped tut-tutting Amazon for its low profit margins. In the 1990s, the cool rap on Amazon was that it "would never make money." Now the rap is that Amazon isn't making enough money.
Meanwhile, over the past ~15 years, Amazon's stock has risen more than 70X from its IPO price. And Amazon has become the dominant global force in eCommerce. And Amazon has built a spectacular service that hundreds of millions of customers in dozens of countries love.
Amazon has never worried about this quarter's earnings per share.
Amazon has never been afraid to make big, bold bets on the future. (It's making at least two very expensive ones today: Kindle and Amazon Web Services).
Amazon has never worried about the screams of myopic, impatient investors.
And now Facebook is following in Amazon's footsteps.
In short, Facebook is focusing on creating value for the four constituencies that every great company should create value for:

• Customers
• Employees,
• Shareholders, and
• Society

Facebook isn't just dancing on Wall Street's puppet strings.
That's a great thing.
Not just for Facebook's customers, employees, and shareholders. But for the global economy, too.
More companies need to think this way.
And we should all celebrate the ones that do.