Nearly 60 years ago, Stanford researchers offered children a simple choice: eat one marshmallow immediately or wait and receive two. The experiment became famous as a measure of delayed gratification. Researchers tracked the participants for decades and found a strong correlation between the ability to delay gratification and future success.
Children who managed to wait for the second marshmallow generally had higher SAT and ACT scores, better stress management and self-control, lower rates of substance abuse, and a healthier body mass index.
CEOs of American companies today are facing the corporate equivalent of the Stanford marshmallow test. Flushed with robust profits, they can use the money to buy back their stock, boost their share prices, and be hailed in the media for their stellar business stewardship—or they can use the money to invest in ventures that will grow their businesses and increase the real value of their enterprises over time.
Indications are that most CEOs of American companies today would have grabbed the initial marshmallow.
In the first half of this year, American corporations have already spent nearly $1 trillion buying back their stock. Based on U.S. Bureau of Economic Analysis data and S&P 500 filings, buyback spending exceeded 100 percent of six months’ worth of net profits among S&P 500 companies. To fund their buybacks, some companies take on more debt, drain their cash reserves, and sell or close businesses requiring capital to grow.
GM CEO Mary Barra is the poster CEO for stock buybacks, having authorized more than $23 billion to buy back 35 percent of the company’s outstanding shares in the past three years. The buybacks bolstered GM’s share price and allowed Barra and President Mark Reuss to sell big chunks of their holdings amid the run-up. On a percentage basis, GM is among the most aggressive repurchasers of its stock.
Fittingly, Barra is a past chair and a director of the Business Roundtable, the lobbying group for CEOs of major corporations.
It takes considerable confidence and leadership to resist Wall Street’s demand for instant marshmallow gratification and buck the buyback trend. But three leaders of major corporations have demonstrated the willpower to invest their profits rather than squander them propping up their share prices in the short term: Tesla’s Elon Musk, Alphabet’s Sundar Pichai, and Amazon’s Andy Jassy.
Tesla’s and Alphabet’s stock prices have taken a pounding since the companies reported their second-quarter earnings on Wednesday, despite soaring revenue gains. Investors are more concerned about another metric known as free cash flow, which is the pot of money generated to buy back more stock and feed investors more marshmallows.
Alphabet, Google’s parent company, has advised investors that it could spend as much as $205 billion this year deepening its AI investments and ensuring that it continues being a tech disruptor rather than becoming an AI company’s roadkill. Tesla is spending big on autonomous vehicles and humanoid robots. That includes a chip-manufacturing facility called Terafab, which Tesla is developing in partnership with Musk’s rocket company SpaceX and Intel.
Amazon years ago trained Wall Street that it wouldn’t engage in massive stock-buyback sprees to gratify investors’ short-term marshmallow cravings, redirecting capital instead into AWS expansion, AI data centers, and custom chips such as Trainium and Inferentia. Not surprisingly, Amazon’s stock trades at around 29 times earnings—historically one of its lowest valuation multiples.
The corporate media views the collective wisdom of Wall Street as the best gauge of business strategies, when in fact the record indicates it is often the most clueless.
In Amazon’s early years as a public company, Wall Street was skeptical it would ever be profitable, but Jeff Bezos ultimately proved investors wrong. Then, when Bezos opted to reinvest those profits into cloud storage, Wall Street questioned that strategy too. Today, Amazon Web Services is the company’s primary profit engine, and Bezos can now acquire and feast on every marshmallow on the planet.
Alphabet’s driverless taxi business Waymo is just one example of the company’s marshmallow restraint. Waymo is part of Alphabet’s portfolio of “moonshot” businesses funded with the expectation that, while most would likely fail, one huge success would more than offset the other losses.
Despite skepticism that driverless taxis would ever be commercially viable, Alphabet continued funding Waymo and never once hyped its potential, even after it established itself as the leader in the robotaxi space. Waymo’s latest venture-capital funding round valued the company at more than $120 billion; some investors say it is poised to become a $1 trillion company and ultimately be worth more than Google’s advertising business.
By contrast, GM’s Cruise subsidiary was once a formidable rival to Waymo, and Barra aggressively promised Wall Street that it would generate $50 billion in annual revenue by the end of the decade. Barra pulled the plug on Cruise in late 2024, saying it wasn’t part of GM’s core business, and instead diverted the automaker’s free cash flow to buying back more stock.
Elon Musk has repeatedly defied Wall Street’s negative criticisms and predictions.
In late 2022, ubiquitous technology analyst Dan Ives declared Tesla’s stock “a train wreck” because of Musk’s antics—this was even before his DOGE escapades—and warned CNBC viewers that he had removed the company from his “best ideas” list.
Within weeks, Tesla’s stock more than doubled, netting its biggest investors some $117 billion in collective profits and allowing them to make more on their holdings than all investors made on 496 individual S&P 500 stocks during the same period.
It appears that Ives these days supports Alphabet’s and Tesla’s capital expenditures, known as CapEx.
Technology executives aren’t alone in proving that Wall Street’s wisdom is mistaken.
Walmart shares plunged 10 percent in a single session, vaporizing about $21.5 billion in market value, after then-CEO Doug McMillon gave frontline workers the biggest raise in company history. McMillon’s move proved savvy: retention improved, stores stabilized, and high performers were promoted rather than poached.
Under McMillon’s leadership, Walmart added more than $576 billion in market value and delivered total returns north of 400 percent.
Toyota for years took a beating for its refusal to immediately embrace electric vehicles, arguing that hybrids would better facilitate the transition to an all-electric future. Toyota dominates U.S. hybrid sales, the fastest-growing powertrain segment, and market analysts say the company could overtake GM this year as the leader in U.S. automotive sales.
I’m not suggesting that Amazon’s, Google’s, and Tesla’s massive AI investments will ultimately play out for the benefit of investors. Perhaps they will prove as misguided as Barra’s EV investments, which GM has chosen to write off over time rather than in one fell swoop, as Ford and Stellantis did. But companies can’t make meaningful returns on investments if they don’t make sizable investments.
CEOs who allow Wall Street to dictate their business strategies would be akin to NFL coaches letting fans in the bleachers call their plays to boost ticket sales and the value of the franchises. And managing a company to please investors on a quarterly basis is a major competitive disadvantage when going up against surging Chinese entrepreneurial companies.
I’m still haunted by a video of Stella Li, a top BYD executive who has spearheaded the EV company’s global expansion. Li said the company’s management based its decisions on a 30-year horizon. Not surprisingly, China’s emergence as an EV powerhouse began in the 1990s, when GM was a powerhouse not only in the U.S. but also in China.
BYD boasts that it employs 120,000 engineers, yet Barra blames China’s subsidies for creating an uneven playing field. GM could employ an army of engineers with the $23 billion Barra has spent on stock buybacks.
GM’s China sales today are so minuscule that some analysts question why the company even bothers doing business there anymore.