For all you Seinfeld fans, there is a classic line from George regarding telling a lie. To paraphrase, it goes something like this… “Jerry, it is not a lie, if you believe it.” This line comes to mind when I read about these new economy companies (both private and public) introducing alternative metrics to better measure the success of their enterprises. The majority of the population are huge fans of the services/products these companies are inventing, but as an investor… alternative metrics!?!?!
Whether you are new to investing or have decades of experience under your belt, ultimately, you measure the success of a business by the real value it creates. To simplify, if this was the stone age and we did not have financial institutions, success would be measured by the amount of cash you have left in the proverbial cigar box after you pay all your bills. But I digress and I am an open-minded investor, so let’s review a few of the more popular alternative metrics.
Take everyone’s new favorite taxi cab company… Uber. They share a metric called “core platform contribution profit” that they feel does a better job gauging their performance. This metric just happens to ignore significant expenses. Surprise to no one, the result of this is a nearly $1 billion gain, while your more traditional operating income/loss results in a $3 billion loss. Hmmm…
Another fan favorite that has yet to come public, is WeWork. For those unfamiliar, these guys provide shared office space. Not an entirely new idea, but they definitely have a different spin on it and have seen tremendous growth. Unfortunately, this is not (or even close to) profitable growth, so they have invented a new profit metric called “community-adjusted Ebitda.” This metric resulted in a near $500 million gain, while the generally accepted accounting principles net profit/loss metric for the same period was just below a $2 billion loss. Hmmm…
There are more examples, but I am sure you get the point. There is no doubt the leaders of these fine companies do believe that their alternative metrics do a better job of measuring their firms’ performance at this point, but I got to think the real goal here is to keep investors interested/excited about their venture until they are at least sniffing the more traditional crazy metrics… you know, a net profit!
Our investment approach, for the most part, precludes us from entertaining any investment in a habitual money losing enterprise. But this doesn’t mean Uber, WeWork, or any other of these companies won’t turn out to be great profitable operations one day in the future. But rather than use made up metrics, how about these companies take a stab at just telling the unvarnished truth (i.e., we will lose money for X number of years and anticipate profit in year Y). This isn’t new, just a thought…
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