Desperate Times Call for Desperate Measures

Let’s dissect that maxim as it applies to Airbnb for a minute…

Defined as “having lost hope” and “moved by despair,” “desperate” is the wrong word. Airbnb’s founders didn’t lose hope. They weren’t moved by despair. They hadn’t been evicted and they weren’t wandering the streets, bathed in self-pity.

There’s a better way to capture their experience: “In adverse circumstances, actions that might have been rejected under normal circumstances may become the best choice.”

Not as smooth as the former, but certainly more accurate.

No doubt, Airbnb was born out of adverse circumstances. And you can make a strong case that Airbnb may never have existed if the founders enjoyed cushy, high-paying jobs. Instead, they’d likely have focused on buying a new house… or lobster and champagne dinners… rather than toying with the idea of letting strangers sleep on air mattresses in their living room.

But that’s human nature, right? Why innovate when you’re comfortable?

Airbnb epitomizes this.

Yet, even large, established corporations face adversity every day. They fight off competitors. They fight to grow their customer base, even as their customers’ wallets shrink. They fight to exceed Wall Street’s imposed expectations. And the good few fight the urge to become complacent.

Truth is, corporate CEOs face tough choices with every dollar that comes into their coffers. They can spend it in a number of ways…

Paying their employees better…

Giving bonuses to top performers…

Rewarding shareholders…

Building a cash reserve safety net…

Or, they can invest that dollar in the company’s future, through research and development (R&D) spending.

As you can see, R&D spending is the lifeblood of successful companies…

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This chart shows the correlation between R&D spending growth and revenue growth.

The relationship is remarkable.

On the high end, Google (GOOG) increased its R&D spending more than 50% per year from 2004 to 2012. This investment paid off, as the company enjoyed sales growth of more than 40% per year during that time.

On the low end, chip-maker Applied Materials Inc. (AMAT) grew its R&D spending less than 5% per year. Whether it paid bonuses or dined on lobster and champagne is beside the point. Fact is, the company has averaged 0% sales growth since 2004.

Lesson to learn: innovate or die. (And, it takes money to make money)

For astute investors, this study gives us a great way of forecasting a company’s revenue growth: Simply calculate how much money the company is putting to work in R&D.

Likewise, you can learn to avoid companies decreasing their R&D spending. It’s highly likely their revenue growth is weak, if not declining.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.