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Fighting the Stock Market’s ‘Disruption Discount’

There’s a ton of commentary these days about the impact of disruption on large enterprises.

calendar icon July 12, 2017

There’s a ton of commentary these days about the impact of disruption on large enterprises. Much of the discussion focuses on the impact on brand value and customer perception, market share, revenue and profit.  But I spent some time digging into the impact on stock prices.

If stock prices are a reflection of a company’s ability to produce future profits then it should also be a good indicator of whether  investors believe the company is well positioned  to navigate innovation-driven markets. This means that for CEOs to keep their job, they need to hit quarterly  numbers and also build shareholder confidence in future growth and long-term company viability.  A recent comparison of Amazon’s stock price with Walmart’s tells the story: growth and innovation wins hearts, minds and checkbooks.

Plenty of CEO’s have been trying to convince Wall Street that they are way more innovative than they get credit for, which is a motivator behind so called “innovation theater”. They may not have all the answers for how to better compete in this new digital age, but most CEOs know how to spin a story until they figure it out.

Of course this “kabuki dance” can only last so long before financial performance tells the real story.  Earlier this year the PwC Global Fintech Report stated that 88% of incumbent financial services companies believe that they’re under substantial threat from fintech startups. The percentage of their revenue that they view as at risk is now up to 24%. Ouch. Given that these companies tend to have a ton of fixed costs (like tall buildings in Manhattan, Hong Kong and London), losing a quarter of the top line doesn’t bode well for future earnings.

There are obviously many factors at play in public market valuations. However there’s historical research to back up the idea of a “disruption discount”. When markets anticipate changes in technology that impact earning potential, stock prices reflect it. Given the pace of change in today’s global economy, that puts trillions of dollars of market value at risk.

The bottom line (excuse the pun) is that delivering short-term profits is no longer sufficient. Enterprises need to invest in innovation or they’ll be swimming upstream against a deeper and deeper discount on those profits.  And unhappy shareholders is not a good recipe for future success.