The date was 25 January 1999. Motley Fool co-founder David Gardner was interviewing a bald-headed CEO of a fast growing internet retailer, one which had audaciously referred to itself as ?Earth?s Biggest Bookstore?.
It was that moment when a strange sounding question went to the online bookseller that day, as the CEO was asked about having advertisements for kayaks placed on his firm?s website. Unfettered, the CEO replied that every pixel on his website was scarce (at that point of time), but advertising was an option for the future.
The date was 25 January 1999. Motley Fool co-founder David Gardner was interviewing a bald-headed CEO of a fast growing internet retailer, one which had audaciously referred to itself as “Earth’s Biggest Bookstore”.
It was that moment when a strange sounding question went to the online bookseller that day, as the CEO was asked about having advertisements for kayaks placed on his firm’s website. Unfettered, the CEO replied that every pixel on his website was scarce (at that point of time), but advertising was an option for the future.
Fast forward 15 years to today, and what was once “Earth’s Biggest Bookstore” has come a long way. According to eMarketer, the company is estimated to pull in US$1 billion in advertising revenue within the next year. So, evidently the online outfit had moved beyond just selling books and was now referred to as the “Everything Store”.
That CEO was Jeff Bezos. His company is Amazon.com, and yes Foolish folks, it now sells kayaks online as well.
Multiple futures and optionality
In a video shared in March this year, David shared his initial thoughts about the visionary leadership at Amazon. Although the future was vague at that point in time, Amazon was already taking “communal mindshare” among its customers. With this in mind, David suggested that — with a little imagination, mixed with a dollop of common sense – it was possible that Amazon would well go beyond selling books. After all, the online outfit did not name itself “OnlineBooks.com”.
These multiple possible futures, or optionality might be an element which leads to big winners over time.
Seeking multiple futures for SGX
Take Japan Foods Holding Ltd (SGX: 5OI), for instance. In the financial year ended 31 March 2009 (FY2009), the Japanese food and beverage retailer recorded 23 stores in total. The 23 stores were spread over five different brands with the bulk of the stores coming from the company’s flagship brand Ajisen Ramen.
Fast forward 5 years later to 31 March 2014, and the brands and outlets under Japan Foods has grown considerably to 12 brands spread over 59 outlets (company owned and franchised), as shown in the chart below.
Through rigorous experimentation with different concepts, the nett effect for Japan Foods was an increase of 36 stores over the five years, and the expansion from five brands to 12 brands in total. In particular, the Menya Musashi ramen restaurants have quickly expanded to 16 outlets in less than three years. In short, Japan Foods currently looks very different from where it first started.
According to an interview by Asean Equities with Japan Foods Chief Executive Officer Takahashi Kenichi, the company’s track record of execution has attracted other overseas restaurants looking to break into South East Asia. This further increases the possibilities of new brand outlets for growth, or optionality, for the company.
The increase in brands has turned into a strength for the company. According to another interview by The Business Times, the variety of brands under Japan Foods has also found interest from shopping centre landlords who seek new, differentiated food experiences for their malls.
The share price for Japan Foods has followed its growth in outlets and brands; from 31 March 2009 to its closing price last Friday, Japan Foods has grown by 445% in price. Shares of the Japanese food purveyor carry a price to earnings (PE) ratio of 14.5 as of 29 August 2014. That is higher than the comparable PE ratio of the SPDR STI ETF (SGX: ES3) of around 14; the STI ETF is a proxy for the Straits Times Index (SGX: ^STI), Singapore’s share market benchmark.
Foolish bottom line
In the past, we have spoken about thinking through on what could go wrong in a company (margin of safety). On the flipside, we should also spend time thinking aobut what could go right.
Thinking about the company’s optionality may help the individual investor to figure out how big a company can grow up to be and what are the probabilities of that growth. This is done in the spirit of considering both sides of the coin, and it might help us come out with a well-rounded thesis for every company.
That said, caution is also necessary. Multiple futures could also lead to undisciplined diversification or in Peter Lynch’s parlance, “diworsification” – so, watching over the company’s actions over time also matters.
But if we consider how “Starbucks Coffee” became “Starbucks” and “Apple Computer” turned into “Apple”, the expansion in product possibilities may ultimately bring even some of the best and largest brands in the world to new heights. Hence, considering the multiple possible futures – with a dollop of common sense, no less – might just add another investing lens for us to view companies.
The 1999 interview Jeff Bezos did with Tom and David Gardner can be found here.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Amazon, Starbucks, and Apple