Investors might think it's helpful for a business to have a long-term strategy and be told in detail how management will go about it, but this could be the very thing holding a company back, as it restricts the ability to adapt to an increasingly volatile world.
This month, French researchers found an old diabetes medicine called lixinsenatide could help slow the onset of Parkinson’s disease. The drug, made by French pharmaceutical company Sanofi, is similar to Novo-Nordisk’s more famous GLP-1s: Ozempic and Wegovy. This suggests such drugs could also prevent brain inflammation and neurological degeneration on top of their already known benefits.
In the pharmaceutical world, discovering a drug has an unintended effect is common. As discussed previously in The Squeeze, the anti-depressant Prozac was developed following research into treating high blood pressure, as was Viagra. Finding a profitable side effect such as this is known as “repositioning”, and, it is not exclusive to the drug industry.
Amazon famously started as an online bookstore, which morphed into an online everything store. However, when it launched a third-party marketplace called Merchant.com it realised its internal IT systems were a mess. The company then built one centralised database all its engineers could build on top of. It then opened this up to external developers in 2002, but the popularity meant Amazon had to build more and more physical infrastructure. In 2006 Amazon officially launched its first cloud storage solution, now known as Amazon Web Services (AWS).
Since 2015, when Amazon started separately reporting its AWS performance, its operating profit has risen 1,266 per cent, from $1.8bn to $24.6bn. Last year, AWS made up two-thirds of the company’s profit. In 2022, Amazon would have made an operating loss of $10bn without AWS’s contribution.
It is a similar tale at Nvidia. When it invented the gaming graphics processing unit (GPU) it later discovered that parallel computing chips could train AI models. Nvidia’s GPUs were first used for AI by independent scientists to identify cats in YouTube videos in 2012. Chief executive Jensen Huang then realised the potential. In 2017, Nvidia tweaked its GPUs to focus on AI calculations and in 2020, it acquired the computing infrastructure company Mellanox for $6.9bn, to cement its position as the leading AI computing company.
This foresight has only now started generating rapid earnings growth. Only two years ago, gaming was still Nvidia’s dominant business. In the 12 months to January 2022, Nvidia made $15.9bn from graphics and just $11bn from computing. In 2024 graphics revenue fell to $13.5bn while data centre revenue expanded to $47.5bn. One of the main reasons why Nvidia could pursue this strategy is because it had $7.4bn of cash and only $1.9bn of debt when the chance to buy Mellanox arrived. It had the balance sheet strength to react quickly.
Executives often try to sell their companies by sharing long-term visions but investors should be wary, especially if there's debt involved.
Helios Towers borrowed billions of dollars to acquire telecom towers across Africa. The plan is that as the African population increases and smartphone usage spreads, Helios’s cash flows will rise to pay off this debt. However, with its $1.8bn net debt more than 10 times its operating profit, there's little room for error. What if global warming leaves large parts of Africa uninhabitable or Elon Musk’s Starlink becomes cheap enough to make the traditional telecom towers redundant?
The world is constantly changing, and no one can predict how. The most successful companies are those that can adapt. This means having both management and a balance sheet that can respond quickly. Apple started as a computer company before Steve Jobs developed the world’s most popular phone. Even today Apple rarely shares its product strategy with the market, despite some investors pressuring it to be more transparent.
As the world becomes more volatile the ability to reposition will only increase in value. Don’t trust the person that can promise the future. Trust the one that can adapt to it.
