The Jeff Bezos Approach to Stock Price
In April 2008, Peter Burrows of Businessweek sat down for an extensive interview with Amazon CEO Jeff Bezos. The article, Bezos On Innovation, featured this piece of quotable wisdom on how to teach your employees to think about the value of the stock they own in your business:
We have three all-hands meetings a year, and I’ll tell people that if the stock is up 30% this month, please don’t feel you are 30% smarter. Because when the stock is down 30% a month from now, it’s not going to feel that good to feel 30% dumber.
The salesforce.com Contrast
I thought of the quote early this morning while drinking coffee and reading Behind the Cloud by Marc Benioff. The salesforce.com CEO has this to say about the morning the company listed on the NYSE:
The elation I felt on the morning we went public lasted long beyond the opening bell. It was incredibly gratifying to watch the stock climb; you can’t help but take it very personally. We ended our first day of public trading at $17.20, a 56 percent gain – making salesforce.com the best-performing tech IPO 2004 had seen thus far.
I don’t fault him for being excited. He just realized a long-held professional ambition for himself, doing so at the helm of a business that was ushering in a paradigm change (and that is not hyperbole, I can’t overstate what salesforce.com has done to software) in the way an entire industry operated. Elation is a natural and justifiable emotional response.
He does represent, however, the starkest EMOTIONAL contrast to Bezos’ highly RATIONAL approach to what the stock price of your business actually means. It’s tempting for CEO’s to interpret it as a sort of validation of their ideas and performance; that a high multiple of price to earnings means you’ve done something intelligent and virtuous to earn the trust of Wall Street.
They understand you, and you yearn to be understood.
But what have you committed yourself to? What happens when you have to make a decision that you know is in the best long-term interest of your business but that hurts short-term profitability, up-ending your string of quarter-over-quarter earnings growth?
Now you’re misunderstood. Wall Street punishes you. That stock price, trading at such a high multiple to profits, suddenly seems way too high to the analysts and existing investors. It plummets.
How do you feel now? More importantly, how do you explain that to your employees who shared your excitement but don’t really understand that stock price and business performance are often disconnected?
Jeff Bezos earned his perspective the hard way. Later, in the same article as above, Bezos has this to say:
When the Internet bubble burst, our stock went from over 100 a share to a low right after September 11 of 6. Throughout that entire period, the fundamentals of the business continuously improved. You can see the stock price going in the opposite direction of the fundamentals. So it wasn’t that worrisome to us.