In the 1990s, as the tech markets were creating massive paper wealth, every company wanted to be a technology company. Applebee’s famously claimed they were a tech company; I doubt anyone with two brain cells took them seriously.
But as tech becomes hot again, we’re seeing more companies following those 90’s trends – absent frosted hair tips, of course. For some, they’re simply buying tech companies to learn from founders and adopt new practices. For others, it’s been the creation of corporate venture funds to invest in technologies directly. And for a small few, it’s claiming to be something they most certainly are not.
My favorite, I must admit, is Domino’s proclamation that they’re a tech company.
When Domino’s claims it’s a technology company, it’s not quite clear what they mean. While technology is a catch-all for a wide spectrum of solutions, I’m assuming they mean to say they’re a software, data analytics or ecommerce company, since those would be the only tenuous technology labels I could apply.
Let’s examine how investors view Domino’s claim. First, Domino’s P/E (price to earnings) ratio sits at 34 and some change. I’m going to use P/E as the denominator in the below analysis because I’m too lazy to build a financial model. See Domino’s profile from Google Finance below.
Now we need to compare Domino’s PE to the PE for restaurants and technology companies. NYU Stern publishes a list of index averages anyone can examine. The average PE of restaurant and software companies has been consolidated into the table below.
Dominos is not looking too hot when it stacks up to software companies, let alone restaurants.
Okay, well maybe when Domino’s claims they’re a tech company they really mean to specify they’re an ecommerce company. After all, tech covers a lot. Since NYU Stern doesn’t have consolidated P/E from ecommerce companies, I went ahead and pulled some values with an average PE at the bottom.
Soooo Domino’s is trading at 1/3rd the value of the average public ecommerce company, and only 1/4th the value of public software/internet companies. Why is it?
Is it that those pesky Wall Street analysts just don’t understand Domino’s business? That they have no idea how to actually value an asset? That some earn a measly $3.5B annual salary but aren’t smart enough to understand Domino’s super secret technology business?
Let’s examine this further with some admittedly crude Linkedin analysis that will nonetheless demonstrate the point.
Domino’s has 13,629 employees on Linkedin. If we search for “engineer,” “data” and “data science” – positions that technology companies covet – I’ll assume we will find Domino’s employees who have correctly identified themselves to serve in those technology roles.
Now I’m going to do the same thing for two random public ecommerce companies: one with a lower P/E (eBay) and one with a higher P/E (Netflix). As an honest audit, I’m supplying screenshots of my figures below.
The result produces this not-so-convenient table for Domino’s:
The table shows the raw number of Linkedin employees at each of the three companies who fit the engineer, data and data science roles, and what percent those roles comprise of their respective company workforce. Domino’s has 5% the number of engineers eBay has and < 3% the engineers Netflix has. It also has 20% of the data profiles and 10% of the data science profiles comparatively. I think I can fairly sum it up in three words:
Domino’s, You Lie
See, Dominos does this non-trivial thing called serving food. In fact, it’s nearly 30% of its expenses. Guess what food costs are for eBay and Netflix? Here’s a hint: multiplying any integer by its value produces the value.
Domino’s is really just a manufacturing company that uses technology to improve its business. It’s no different than the high school paperboy now using Google Maps on his iPhone to optimize his bike routes. But just because you’re using technology to improve some aspect of your business does not a technology company make.
Who the hell would believe otherwise?
However, Domino’s claim, if reworded, does stand up relative to the overall restaurant industry. For this discussion, we must wait for Part 2.