Uh oh, Epic’s not making more profit than last year! We need to squeeze money out of parents’ pockets for their gullible kids and milk our cash cow harder!
With Epic, and most companies, it’s not even that they don’t make more profit each year - but that investors (shareholders) now expect not a net growth in revenue/profit, but a net growth on the net growth in profit!
I know it sounds confusing so let me break it down:
Company makes X1 profit one year.
Next year, company makes X1 + 3% profit (X2 is thus X1 * 1.03)
The following year, the company makes X2 + 9% profit (X3 is thus X2 * 1.09, or X1 * 1.03 * 1.09)
Then the year after that, the company makes X3 + 12% (aka X4 = X3 * 1.12 = X2 * 1.09 * 1.12 = X1 * 1.03 * 1.09 * 1.12).
The net growth on net growth is thus explained as 3% to 9% to 12%.
And investors/shareholders are now demanding not just that revenue grows but that the growth of revenue also grows linearly.
Meaning if in the fifth year, the revenue grows, but only by, say, 2%, they consider that as a bad year because the last year the growth was 12%, so this is a 10% setback, aka time to bring in a “shaker”, who fires half the departments to save money, introduces bullshit “oh poor company doesn’t have money” customer-facing crap like Epic just did; then pick up a hefty bonus and fuck off to the next company to ruin.
What you’re describing is called a Growth Stock as opposed to a Mature Stock. I heard these terms recently when reading about the AI bubble and will just quote the relevant parts, because the author describes it better than I ever could:
You see, when a company is growing, it is a “growth stock,” and investors really like growth stocks. When you buy a share in a growth stock, you’re making a bet that it will continue to grow. So growth stocks trade at a huge multiple of their earnings. This is called the “price to earnings ratio” or “P/E ratio.”
But once a company stops growing, it is a “mature” stock, and it trades at a much lower P/E ratio. So for every dollar that Target – a mature company – brings in, it is worth ten dollars. It has a P/E ratio of 10, while Amazon has a P/E ratio of 36, which means that for every dollar Amazon brings in, the market values it at $36.
It’s wonderful to run a company that’s got a growth stock. Your shares are as good as money. If you want to buy another company, or hire a key worker, you can offer stock instead of cash. And stock is very easy for companies to get, because shares are manufactured right there on the premises, all you have to do is type some zeroes into a spreadsheet, while dollars are much harder to come by. A company can only get dollars from customers or creditors.
So when Amazon bids against Target for a key acquisition, or a key hire, Amazon can bid with shares they make by typing zeroes into a spreadsheet, and Target can only bid with dollars they get from selling stuff to us, or taking out loans, which is why Amazon generally wins those bidding wars.
That’s the upside of having a growth stock. But here’s the downside: eventually a company has to stop growing. Like, say you get a 90% market share in your sector, how are you gonna grow?
Once the market decides that you aren’t a growth stock, once you become mature, your stock is revalued, to a P/E ratio befitting a mature stock.
If you are an exec at a dominant company with a growth stock, you have to live in constant fear that the market will decide that you’re not likely to grow any further. Think of what happened to Facebook in the first quarter of 2022. They told investors that they experienced slightly slower growth in the USA than they had anticipated, and investors panicked. They staged a one-day, $240B sell off. A quarter-trillion dollars in 24 hours! At the time, it was the largest, most precipitous drop in corporate valuation in human history.
That’s a monopolist’s worst nightmare, because once you’re presiding over a “mature” firm, the key employees you’ve been compensating with stock, experience a precipitous pay-drop and bolt for the exits, so you lose the people who might help you grow again, and you can only hire their replacements with dollars. With dollars, not shares.
And the same goes for acquiring companies that might help you grow, because they, too, are going to expect money, not stock. This is the paradox of the growth stock. While you are growing to domination, the market loves you, but once you achieve dominance, the market lops 75% or more off your value in a single stroke if they don’t trust your pricing power.
Which is why growth stock companies are always desperately pumping up one bubble or another, spending billions to hype the pivot to video, or cryptocurrency, or NFTs, or Metaverse, or AI.
A growth stock is just that, a company that is expected to grow. These expectations are usually set by market analysts, based on historical data of the past 5 years, and tons of other metrics.
The problem is that what I described is not just growth, but the growth of growth. To put it in other words, most companies will only ever achieve more or less linear growth due to limiting factors (reach of product, available resources, etc. - e.g. you can’t manufacture 2 billion phones a year because there’s simply no 2 billion screens being produced, or you couldn’t sell 2 billion phones because there’s no 2 billion customers who’d all buy the same device). Some does experience short periods of exponential growth (that is when year on year the company’s growth increases, as I described above), 3-5 years at most, and that’s it.
The issue is that now shareholders demand that every company be growing exponentially, during a time of increasing poverty (inflation is high, pay hasn’t been catching up to it, leading to reduced spending by the average people, having less disposable income, and because of all that, less products are being bought, making less profit to companies).
And there’s another aspect as well - a loss of general humanity in investments over the past ~30 years, with investment corporation stacks buying up everything and anything valuable. This led to investors being corporations owned by corporations owned by corporations, and shares/companies at the bottom of the ladder are nothing more than numbers.
The issue with this is simple - the companies that depend on a wealthy enough population to buy their crap, are closing down companies and killing off jobs to bolster short term profits, leading to the “reason” why they wanted the short term profits: because sales are dropping because people have less disposable income. It’s basically a self reinforcing death spiral on a global scale, all caused by some wankers’ greed and lack of understanding of economics.
Uh oh, Epic’s not making more profit than last year! We need to squeeze money out of parents’ pockets for their gullible kids and milk our cash cow harder!
With Epic, and most companies, it’s not even that they don’t make more profit each year - but that investors (shareholders) now expect not a net growth in revenue/profit, but a net growth on the net growth in profit!
I know it sounds confusing so let me break it down:
Company makes X1 profit one year.
Next year, company makes X1 + 3% profit (X2 is thus X1 * 1.03)
The following year, the company makes X2 + 9% profit (X3 is thus X2 * 1.09, or X1 * 1.03 * 1.09)
Then the year after that, the company makes X3 + 12% (aka X4 = X3 * 1.12 = X2 * 1.09 * 1.12 = X1 * 1.03 * 1.09 * 1.12).
The net growth on net growth is thus explained as 3% to 9% to 12%.
And investors/shareholders are now demanding not just that revenue grows but that the growth of revenue also grows linearly.
Meaning if in the fifth year, the revenue grows, but only by, say, 2%, they consider that as a bad year because the last year the growth was 12%, so this is a 10% setback, aka time to bring in a “shaker”, who fires half the departments to save money, introduces bullshit “oh poor company doesn’t have money” customer-facing crap like Epic just did; then pick up a hefty bonus and fuck off to the next company to ruin.
What you’re describing is called a Growth Stock as opposed to a Mature Stock. I heard these terms recently when reading about the AI bubble and will just quote the relevant parts, because the author describes it better than I ever could:
Pluralistic: The Reverse Centaur’s Guide to Criticizing AI from Cory Doctorow
Well, not exactly.
A growth stock is just that, a company that is expected to grow. These expectations are usually set by market analysts, based on historical data of the past 5 years, and tons of other metrics.
The problem is that what I described is not just growth, but the growth of growth. To put it in other words, most companies will only ever achieve more or less linear growth due to limiting factors (reach of product, available resources, etc. - e.g. you can’t manufacture 2 billion phones a year because there’s simply no 2 billion screens being produced, or you couldn’t sell 2 billion phones because there’s no 2 billion customers who’d all buy the same device). Some does experience short periods of exponential growth (that is when year on year the company’s growth increases, as I described above), 3-5 years at most, and that’s it.
The issue is that now shareholders demand that every company be growing exponentially, during a time of increasing poverty (inflation is high, pay hasn’t been catching up to it, leading to reduced spending by the average people, having less disposable income, and because of all that, less products are being bought, making less profit to companies).
And there’s another aspect as well - a loss of general humanity in investments over the past ~30 years, with investment corporation stacks buying up everything and anything valuable. This led to investors being corporations owned by corporations owned by corporations, and shares/companies at the bottom of the ladder are nothing more than numbers.
The issue with this is simple - the companies that depend on a wealthy enough population to buy their crap, are closing down companies and killing off jobs to bolster short term profits, leading to the “reason” why they wanted the short term profits: because sales are dropping because people have less disposable income. It’s basically a self reinforcing death spiral on a global scale, all caused by some wankers’ greed and lack of understanding of economics.
Except every company is a growth stock now. Automotive, insurance, healthcare, energy companies are all working hard to accelerate growth
I always remember the story about how a bank failed to make a record profit however made $6 billion in profit.
…and it’s not enough anyway!