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Growth Pressures Could Deprive Technology Companies of Innovation! 

Facebook, which delivered results above expectations for 14 consecutive quarters, grew more than 50 percent in the last year and increased its revenues to 7 billion dollars, announced that the growth in its revenues may slow down as of 2017. The main reason for this is that Facebook has approached the upper limit on the number of ads it can show in notifications.

The number of monthly active users of Facebook increased by more than 10 percent compared to 2015, reaching 1.8 billion monthly. Active users spend an average of 50 minutes a day on Facebook. These numbers are a good example of the magnitude of Facebook’s success. But even Facebook’s announcement of a slowdown in growth was enough for stock prices to melt 8 percent in one day. However, in the same statement, Facebook also announced a large bouquet of alternative growth strategies. For example, initiatives such as increasing advertising prices, selling advertisements in video format with Facebook Live, increasing the number of advertisements in sectors such as automotive and travel, opening Instagram, Facebook Messenger and WhatsApp to advertisements showed the growth potential of Facebook.

The growth appetite of financial markets never wanes. Investors demand companies to grow under all conditions. As in the example of Facebook, let alone the cessation of growth, even its slowdown is enough for stock prices to melt in a short time.

Many tech companies struggle to meet their high growth expectations:

One of the favorite innovative companies, Under Armor, which brings together technology and sports, saw a 13 percent drop in stock prices when it announced that its growth expectation was around 20 percent last October. Under Armor grew 27 percent in 2013, 32 percent in 2014, and 28 percent in 2015. Its revenues are expected to reach $7.5 billion in 2018.

More recently, Google has come under criticism for its slowdown in growth. To cope with growth pressures, Google first tapped into its core business, Internet businesses near its search engine (such as mail and video services). Later on, he could not help himself to enter ‘remote’ sectors that demanded very different technological competencies. Currently, Google operates in a wide range of areas, from contact lenses that can measure glucose levels, to driverless vehicles, from smart thermostats to fiber internet service. As you know, the company had to be restructured as Alphabet recently due to the discomfort felt by Google’s different and, according to some, risky projects.

Technology companies are developing radical growth strategies to continue their growth. Still, they are struggling to find a solution to falling stock prices. As a solution to this problem, technology companies announced successive stock buyback plans. Facebook has announced that it will make $6 billion in buybacks by 2017. Google started to implement this strategy with a $5 billion buyback plan in October 2015, and announced an additional $7 billion buyback plan last October. Unable to withstand the pressures of activist investors led by the famous investor Carl Icahn, Apple also bought a record-breaking $39 billion worth of stock from the market throughout 2015.

What do share buybacks do?

Stock buybacks are an alternative shareholder reward method to dividends. When a company buys its own shares from investors, the total value-added pie created by the company will be split among fewer shareholders in the future, as the number of shares in the market will decrease. This, for example, pushes up one of the important ratios, such as earnings per share. Also, when the company starts buying its own shares, it signals to the market that it is confident in its own future. Therefore, stock prices are expected to rise with buybacks.

Share prices rose 10 percent when Google announced its buyback plan. Facebook’s stock prices rose just 1% following the announcement of the buyback plan. These buybacks raise questions: Are there no logical limits to the growth we can expect from the world’s largest, most successful companies? With technology advancing rapidly, is it right to divert cash from tech companies to stock repurchase plans? Is it a smart strategy to deprive companies of their R&D and innovation processes of cash in order to artificially drive up their stock prices? We do not yet know the definitive answers to such questions. But if we listen to the famous innovation thinker Clayton Christensen, it is necessary to take into account that excessive growth prospects and artificial stock-buying games can deprive the world of innovation and even prosperity

Growth Pressures Could Deprive Technology Companies of Innovation!  – Birgul Arslan