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Showing posts from May 10, 2015

Would execs forgo innovation-spend if it meant missing earnings figures?

Facebook had a humble IPO and yet earned about $3 billion in profits last year. Twitter had a great start with shares rising 282% from its offering price and yet shares are back where they started. Here's another example. Apple's stock price fell roughly 25% the year it introduced iPod, and yet it was iPod that started "the greatest corporate turnaround in the history of capitalism" with 9 Apple iDevices sold every second today.

Why is it that stock prices of innovative firms do not always reflect company value? Wall Street analysts typically help set stock prices based on a firm's one-year cash-flow projections, whereas making money from innovations takes time (perhaps 3 or more years). Generally, there is such short-term focus that a study by National Bureau of Economic Research found that "80% of executives would forgo innovation-generating spending if it meant missing their quarterly earnings figures."

Sources: Fortune March1, 2015 and Time April 6, …