In the arms race to have the largest, most ostentatious tech headquarters of all, Jeff Bezos wants in. With Apple’s Spaceship nearly up and running, and Google working in its moon-base-like dome called Charleston East, and the workforce of Facebook settling in nicely to their Menlo Park garden-roofed campus, Amazon wants to get in on the new headquarters action.
James Mackintosh writes that the roll out of new headquarters is the latest warning sign for investors. He explains that high capital spending is usually a sign of pending under-performance.
The list of warning signals for shareholders includes diversification into new industries, changes of business model, massive hiring programs, unfettered CEO power, distracted management, and high capital spending. But top of the list for many is the construction of a new headquarters. Hubris, meet Amazon.com . AMZN +0.54%
Amazon has achieved extraordinary feats, most notably in speed of expansion. It hired more than 30,000 people in the last quarter alone, and in the past three years has tripled its head count to 382,400. It appears to have managed this without a hitch, even as it spent billions of dollars on Hollywood productions, launched a hit gadget and ramped up its spending on research and development.
Investors are betting that CEO Jeff Bezos will keep his magic touch, and that money plowed into expansion today represents big profits to be made some time in the future.
History and human nature are against Mr. Bezos—and may eventually prove a headwind for much of the rest of the market too.
The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.
Read more here.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- This is why Dividends are Better than Buybacks - September 19, 2017
- This is One of the Most Conservative Stocks in the World - September 15, 2017
- Did You Miss the Boat on the British Pound? - September 14, 2017