After my post a month ago bemoaning the potential death spiral facing Canada Post, I thought I would provide some balance by discussing the merits of Royal Mail, England’s original version of Canada Post.
In the world of old mail and new mail, there are two key stories right now: the initial public offering (IPO) of Royal Mail and the IPO of Twitter. Perhaps on the outset these two companies don’t seem to have much in common, but at their core they are both in the business of sharing information. Royal Mail delivers traditional letters and packages (a lot of packages these days due to online shopping). Twitter delivers breaking news stories from around the world and LOL cats.
With most traditional IPOs, security regulators require substantial disclosure, including audited financial information months prior to the actual IPO date. Twitter is using a special IPO procedure, the Jumpstart Our Business Startups (JOBS) Act, which allows for substantially less disclosure than a normal IPO. In order to qualify for the JOBS Act IPO, Twitter must have less than $1 billion in revenue. This is about all the financial information we currently know about Twitter. The Globe and Mail had an interesting piece in which the writer stated that they preferred the Royal Mail IPO to the Twitter IPO. Shocking, perhaps, particularly after my post about Canada Post. Royal Mail might seem like a dusty old horse compared to Twitter’s 500 horsepower shiny red convertible. But the G&M article has some excellent points that are worth raising for all accounting students.
Basically, don’t let flash and sparkle distract you from a company’s underlying business model. One thing that financial statements generally do not tell a reader is what the future profitability of the company will be. Financial statements, by design, are historical—they reflect the past. The past is a decent predictor of the future… until it’s not.
What do I mean by that? Well, consider Royal Mail’s history. It has been in the delivery business for over 100 years. It has infrastructure (trucks and buildings) in place and some consistent market demand. Clearly the mail delivery business has changed over the past 100 years and Royal Mail will need to continue to adapt as the market continues to change. But until people stop sending letters and birthday packages, and until people stop buying goods on the Internet and having them delivered, Royal Mail has a stable or slightly declining market. Now lets consider Twitter. Tweeting is free (you get what you pay for in my opinion), so it doesn’t cost Suzi or Tom anything to tweet about their meal or their clothes or some celebrity gossip. Twitter earns revenue through advertising. Companies pay to have their tweets pushed to your twitter account. This can be annoying and I, for one, rarely (if ever) click on those ads. So how effective are those ads? We don’t know—we need to wait to see Twitter’s financial statements.
Now consider the barriers to entry for Royal Mail and Twitter. If you want to compete with Royal Mail, the barriers to entry are high. You need to build a network of collection and delivery locations and you need trucks, buildings, and delivery people. If you want to compete with Twitter, you need a few computer science gurus, some servers, and some late night pizza. The next Twitter could be right around the corner. Instagram, Tumblr, and their like could very well trump Twitter. Then what happens to its advertising revenue? Cue descending slide-whistle sound effect.
Perhaps you remember one of Aesop’s most famous fables, “The Tortoise and the Hare.” Slow and steady may win the race, so choose your investment wisely.
Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)