I think we often underestimate how powerful of a change agent earnings reports are in toppling seemingly unstoppable companies in our economy.
I would classify pretty much every Big Tech company in this "seemingly unstoppable" category right now, most specifically Amazon, Google, and Apple. If the past three years are a signpost of things to come in the next three years, the FTC will continue wagging its finger at Big Tech in the media, but when it comes to passing regulation that materially impacts the landscape they all compete in, they'll continue sitting on their hands. I hope this doesn't happen, and I think it's possible we actually get some substantial regulation on the books, but I won't be going to Vegas on it.
However, we do have a last resort that will likely clean up this mess for us in due time, and it's something all of these companies are legally required to participate in quarterly anyways: earnings reports. Practically all public companies in America use their earnings reports as their measuring stick for success, and thankfully we get to watch it all play out on the open airwaves.
When you're a young company in a growing industry, you build your company strategy, and that strategy informs the expectations in your earnings reports. In other words, you set your business forecasts based on what your planned activities are for that quarter, which makes perfect sense.
However, once you get to a certain level of maturity — think Amazon, Google, and Apple — the formula gets flipped on its head. By this point, you've saturated the market you built your company around, and your core business has started to flatline. However, investors still want to see consistent revenue and profit growth because they want to know if the stock they buy today will be worth a considerable amount more in five years' time. When companies get to this point, things change. It's no longer the company strategy that informs your earnings reports but the needed financial gains on your earnings reports that dictate your company strategy. In other words, you plan your business activities around what your business performance numbers need to be.
This might not feel backwards in theory; it's pretty commonplace to set goals for yourself and then figure out a plan for reaching them afterwards. However, in practice, specifically when you're dealing with behemoth companies, you start to see why this is absolutely a backwards approach. Let's look at Amazon. Amazon has seen its retail business grow to an unthinkable scale over the last 25 years, and its AWS server business has shockingly been the portfolio's crown jewel in the last five years. Yet even with this success, the watchful eyes of investors are forcing Andy Jassy to go back to his staff and say, "We need to add $300 billion to our market cap next year. We have exhausted practically all growth potential on our core businesses. What else can we go into?"
It's no coincidence that Amazon is now doubling-down on healthcare, one of the few industries in America big enough to offer Amazon a path to hitting the growth targets it needs to satisfy investors. Apple is reportedly developing a car for exactly this same reason.
And eventually, after a bunch of iterations of this pattern, these companies grow too ginormous for their own good because they tried to do too much, and they fail. They become totally ineffective and bloated corporations. This is exactly what happened to GE over the last few decades: it has consistently moved into new business units to continue growing and pleasing investors, and time and time again this lack of focus has led it into a nosedive. Similarly, I previously wrote about how Instagram's gluttony will likely be its downfall, which is largely the same concept.
This is how earnings reports are change agents for our economy. They push companies so far beyond the limits of what they can achieve that they eventually fail and get replaced. We still need much better antitrust laws to course correct things faster, but even if the FTC never lays a finger on Amazon, I think our system is incidentally designed to do some of this regulating itself. Out with the old and in with the new. The Wall Street circle of life.
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