Financial reporting, which was designed to approximate the previous
tangible era, has become less useful for investors today because the
fundamental nature of capitalism has changed. Indeed, a recent article in
Harvard Business Review
made a bold claim that, “accounting earnings are practically irrelevant for
digital companies. Our current financial accounting model cannot capture
the principle (sic) value creator for digital companies: increasing return to scale on intangible investment.”
Directionally, the importance of intangible assets will only grow over
time, relative to tangible assets. The essential raw material of more
capital that was so critical for growth throughout the modern business era
is becoming far less important.
The intangible benefits of technology-driven competitive advantage go far
beyond the handful of ubiquitous online giants. Consider the restaurant
business. This industry is very fragmented and most have historically been
resistant to new technologies. Yet,
Domino’s Pizza Inc. (NYSE: DPZ), the world’s largest pizza chain, often refers to itself as a “technology
company” because it has become a key success factor for the company.
This pizzeria’s incredible turnaround started after Patrick Doyle became
CEO in 2010 after some troubled years. He led efforts to completely
overhaul its pizza recipe, root out poor franchisees and, most importantly,
invest for the future and aggressively embrace technology to make ordering
more efficient and customer friendly.
The fundamental improvements of the business have been nothing short of
stunning. Domino’s same-store sales, or sales from stores open at least one
year, have risen in the U.S. market for 28 consecutive quarters at an
average increase of 7.4% since 2010, which is well above all large peers.
Today more than 60% of its orders come digitally, and the firm is targeting
The stock rose from below $9 per share in 2010 and has soared to more than
$260 at the time of writing, an order of magnitude greater than its pizza
chain peers. Domino’s is a wonderful example of the benefits of embracing
technology as a competitive differentiator. Today, almost every successful
restaurant operator is (or should be) trying to emulate some aspects of
Domino’s extraordinary model.
Closer to home, a few Pender mandates owned Panera and one still owns
Starbucks, in part because these companies also make forward-looking
investments in technology as a competitive differentiator. We remain on the
lookout for more well run, traditional businesses, which also see
themselves more as “technology companies” in their space and are investing
ahead of their peers. As we have seen, it can make a big difference and
lead to a long runway of outperformance!
The four most dangerous words in investing.
Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management.
He works alongside David Barr, Pender’s President, in setting the
direction of Pender’s overall investment strategy. This article first
appeared as part of the Pender June 19 Manager’s Quarterly Commentary.
Used with permission.
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