Jeff & Son – Differing KPIs & …

On one hand, while the world may get its first trillionaire, Amazon’s Jeff Bezos by the year 2026; on the other hand, it was not surprising to witness one of the biggest meltdowns in the corporate history, when the results of Softbank were announced. The company announced a net loss of USD 9 billion for the year!! However, it is important to understand the differences between the thought processes of the gentlemen and their Key Performance Indicators (KPIs) who built these empires, one real and the other a little more illusionary!!

While Jeff Bezos’s (Amazon Inc’s letters to shareholders is a treasure trove a must read!! He has focused on Free cash flow per share as a financial KPI.

Why not, focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component – but not the only important component – of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.

Amazon’s financial focus is on long-term growth in free cash flow per share. Amazon’s free cash flow is driven primarily by increasing operating profit dollars and efficiently managing both working capital and capital expenditures. Limiting share count means more cash flow per share and more long-term value for owners.

On the other hand, Masayoshi Son’s financial KPI was Sales and profits, not in the same order (fuelled fooled by debt)! Frankly, the KPI was faulty to begin with!!

Son, the CEO of Softbank Group Corp defended the dismal performance of his investments by taking refuge in Coronavirus causing unprecedent crisis, perhaps, this was coming anyways!! the virus only accentuated the decline. Now, in hindsight, someone could say, this was poised to happen – after all, Cinderella’s ball had to stop – it was about time!!

Obviously, easier to comment in hindsight. However, if one reflects on Mr. Son’s commentary, going as back as 2004:  Eventually, I want to count our net sales in trillions of yen. I want the Group to grow to such a scale that we count net sales in trillions of yen by my forties, and profits in trillions by my sixties.

This was when the company suffered a net loss of over ¥100 billion in fiscal 2003. While the company did achieve net sales, profits and market capitalization in excess of trillions of yen over the last couple of years, however, the very edifice of building up this empire was based on pouring billions of dollars into loss-making internet firms and pushing their valuations to outrageously high levels. Also, with 75% of its total assets being funded by debt, which runs to the tune of 27 trillion Yen (~USD 250 Billion!!!), its being built on a very shaky foundation!!

To become very BIG, one of the primary investing tenets got forgotten: Profits do not necessary translate into cash flows. With wings of many unicorns in the Softbank’s Group now having got clipped, hopefully Masayoshi Son’s KPIs change to include Cash flows, at least!! Perhaps, some lessons from Jeff should be of some help here, at least!!

Disclaimer: Please note that these are my personal views. While I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014. All investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.

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