Whatever happened to the notion of the value of innovation? Peter Drucker, the famous educator and business theorist, once said, “because the purpose of business is to create and keep a customer, the business enterprise has two — and only two — basic functions: marketing and innovation. ” This happens to be important to us at RSR too; our research and commentary is invariably centered around a core tenet that retailers must innovate in order to remain competitive.

Meanwhile in the real world of the investment community, value continues to be defined as meeting expectations. If your company fails to deliver on expectations, look out! You’re going to get hammered.

Case in point: Amazon’s 4th QTR results. The e-marketplace reported on January 31st that net sales increased 35% to $17.43 billion in the fourth quarter, compared with $12.95 billion in fourth quarter 2010. But net income decreased 58% to $177 million in the fourth quarter, or $0.38 per diluted share, compared with net income of $416 million, or $0.91 per diluted share, in fourth quarter 2010. Part of the reason that Amazon’s net is lower is because the company continued its program to invest on its own business in the 4th QTR, with investments in technology and infrastructure, including Amazon Web Services and additional capacity to support its fulfillment operations.

Amazon CFO Thomas J. Szkutak explained the company’s rationale for its capital investment strategy in the quarterly analyst call, “we’ve just seen such dramatic growth in … our retail offerings…. Our third-party with Fulfilled by Amazon, very fast. AWS (Amazon Web Services) has been growing very fast, and so the capacity that we’ve needed to support both our operations capability, as well as the infrastructure capability for our Web Services and our Retail business has been very high. That said, we feel that we’re efficiently deploying that capital. We … had planned to add 17 FCs (fulfillment centers), which is what we did in 2011, bringing our total to 69. And again, that represents the high growth that we’re experiencing. So we feel very good about the investments that we’re making. And with 46% paid unit growth in Q4, we’re still experiencing very high growth. “

All that should be good news, right? A very nice jump in in top line sales, driven by a 177% increase in Kindle sales (which also guarantees that consumers will be buying e-books from Amazon in the future), and continuation of an investment program that enables the company to dominate in the e-space for years to come.

The problem is that “Wall Street ” expected … $18 billion in top line growth, not a measly $17.43 billion (the difference being about 3% of a very large number). So following the earnings announcement, the company’s stock price dropped about $15 (8%). Just to put a little perspective on that, that’s about $7 billion in street value lost in the wink of an eye.

The Cautionary Tale

In 1997, Amazon was the investment community’s darling; on May 15th of that year, the company launched its IPO with the end-of-day stock price about 30% higher than its strike price the night before. In 1999, Time Magazine famously chose Jeff Bezos as “Person Of The Year “. But it wasn’t until January 2002 that the company actually reported a profit. Subsequently of course, reality set in and Amazon then went about the hard business of succeeding in the hypercompetitive retail space, albeit in new and interesting ways. Amazon has systematically knocked off its competitors and created a juggernaut driven by its technology, to the point where some pundits now complain that Amazon has become “The New Walmart “.

In spite of that, Wall Street wants more.

The folks at Facebook ought to be concerned about this little history. On February 2nd, that company announced its intention to launch an initial public offering, and now the discussion is about just how rich 27-year-old CEO Mark Zuckerberg will be. Maybe he should ask Jeff Bezos for some guidance about “life after the IPO “.

What’s the Issue?

The question really is, what is best for a company and its stakeholders: customers, employees, and stockholders? It was the insatiable demand for “making more money from money ” that drove the investment community to the excesses leading to the market crash of 2009. While it may be naïve to think that long-term viability as opposed to short term gain would once again come into vogue following the near-death experience of the “Great Recession “, it is disturbing how quickly the investment community has returned to the “norm ” of obsessing about quarterly results.

The fact is that the retail industry is in a time of fundamental change, and capital investment is required — maybe a lot of it. As we discussed following the NRF event in January, retailers have accepted that consumers can and will use all the “channels ” (both digital and physical) at their disposal to engage with retailers, and that change is forcing companies to re-envision their operational models and the technologies that support them.

One of the cruelest criteria for any capital investment is that it is “EPS neutral “. It’s really a ridiculous notion when you think about it. But underlying that is fear of how the investment community will react. Earnings are a measure — they are not the purpose of the business. The purpose of the business, as Mr. Drucker said, is “get and keep a customer “, and in this world that means innovation, and that means investing in the business, even if that impacts earnings per share.