The chart depicted below charts the prices of the following companies and index (in alphabetical order): Amazon, Apple, Facebook, Google, Microsoft, Salesforce.com, and the S&P 500 Index.

Can you guess which stock price curve belongs to which of the companies listed above?

Source: Google Finance

Here’s a little more information from 2012 to help you guess:

Now, rank order your guess on stock performance for the companies and the S&P 500 returns now and see how well you do, from first to seventh.

Here are the companies’ FY 2016 results with cumulative growth compared to 2012 in the table above:

Wanna change your initial rankings?

Here is the actual return data and ranking of performance:

1. AMZN 291%
2. FB 250%
3. GOOGL 180%
4. CRM 122%
5. MSFT 121%
6. S&P 500 80%
7. AAPL 78%

Take a look at the chart again now that you have the legend for it and look at the path of each stock relative to the others over the 4 year time period (we’ve now included the legend with the original chart for your convenience):

 Source: Google Finance

The market system is messy in how it values in absolute and relative terms the future health of businesses and this shows in the path of the stock returns.  Assessing stock performance annually loses sight of the long-term creation of business value that stock performance eventually must reflect.  And that really is the takeaway here.

Could you have guessed how these stock returns would have turned out?  Of course in rank ordering these, no one could have escaped their general (or specific) knowledge of how well the companies have done since 2012.  But MSFT doing better than AAPL? Or AMZN doing better than FB (given stupendous user, revenue, AND profit growth) or CRM (leader in SaaS adoption)? May have been surprising.

Just for kicks, we snuck in Netflix in the 2nd table of 2016 performance.  Of all of these successes, NFLX was the one that was most down and out in 2012, having just announced its business model shift wholeheartedly to its unprofitable streaming service and the split of its Qwikster DVD by mail fiasco in October 2011 that proved to be a disastrous decision in subscriber churn to both the separation and the requirement to pay separately for its “meh” streaming service.  Here is the graph above now including NFLX:

Source: Google Finance

Wowza! Netflix’s stock performance at 1300% is about an order of magnitude better than the other Internet-enabled services companies we looked at, which were all leaders in the space and have done very well since.  But the huge winner was the company whose starting position was highly in doubt as a mediocre cheap service (really kind of an afterthought on what to watch and how much you paid as a subscriber) and has over the space of only 4 years built itself into a leadership position of a global scale media company, with nearly 100 million subscribers worldwide, and one that is seen as the biggest threat to the traditional trillion dollar global media industry.

In concluding, our point here is that investing is a hard game to tackle.  While as fundamental investors, we at Ensemble Capital always seek out companies with strong moat characteristics trading below our estimate of their intrinsic values, the actual performance of companies we or anyone chooses to invest in will in the long run reflect business performance.  However, over shorter time frames, we can see how messy the market system of valuing that business can be.  Additionally, a change in market perception of a business as one with no-moat to one with a good moat, as the case of Netflix demonstrates, is a very very valuable thing when it comes to ascribing business value.  We certainly agree with that.

Ensemble Capital’s clients own shares of Apple Inc (AAPL) and Netflix Inc (NFLX).

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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