Former General Electric Company (NYSE:GE) CEO Jeff Immelt once considered building its own cloud data centers to run software for both GE and other large companies.
Ultimately, Immelt decided that it was better for GE to focus on the software itself and leave the infrastructure part of the equation to Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and others.
We’ll probably never know if this was the right decision for GE stock, but what we do know is that it is moving full stop into the Internet of Things, using Predix and other data-related businesses as its calling card.
However, as InvestorPlace.com’s Dana Blankenhorn suggests, even if Predix is a hit, it’s a small piece of the GE pie. If Predix hits its sales targets for the next three years, Blankenhorn reminds investors, it will still only represent 10% of the company’s overall sales by 2020.
“The new CEO has talked up broader, company-wide goals, including increasing focus on digitization and getting GE as a whole ready for the Internet of Things and broader penetration of analytics,” wrote InvestorPlace.com’s Vince Martin on August 30. “The company still hasn’t figured out how to monetize its investments in digital — but that may come.”
Clearly, GE couldn’t remain a true “industrial” conglomerate, but from where I sit, GE stock has a better chance of moving higher if CEO John Flannery focuses on creating jobs, not cutting them.
More Employees, Not Less is the Answer
An August 31 article in Fortune magazine suggests that Flannery is looking to make “aggressive” job cuts in the next year to reduce spending and increase profits.
“We have a plan to take out $2 billion in cost by the end of 2018,” GE spokesperson Jennifer Erickson said. “We’ve said John [Flannery] is reviewing all aspects of the company. He will present to investors in November.”
Cutting costs are always easier than actual innovation. It’s the low-lying fruit a new CEO can pick to make an immediate impact with the board. Long-term, however, it does little for GE stock and GE shareholders.
Digitization might be the solution to GE’s woes, but it shouldn’t come at the hands of job losses. Creating jobs is one of the best ways I know of to add value to shareholders and GE stock.
Companies that are adding jobs are growing. That’s simple economics.
GE Job Creation
General Electric at the end of 2006 had 155,000 employees in the U.S. and another 164,000 internationally. In 2016, it had 104,000 employees in the U.S. and 191,000 globally.
So, over the last decade, it’s shed 7.5% of its 2006 workforce or 24,000 people. In the U.S. it has cut 33.0% of its employees, moving those jobs overseas. On the surface that seems like the smart thing to do; move the higher-paying U.S. jobs to countries where wages are lower, creating greater profits.
Only it doesn’t seem to have worked because now Flannery appears ready to make more U.S. job cuts to produce those ever-illusive profits.
GE’s a dog chasing its tail. We all know how that works out.
Amazon Job Creation
Amazon had 13,900 full-and part-time employees at the end of 2006. It doesn’t break out the U.S. numbers. In 2016, it had 341,400 employees globally.
Over the last decade, it has added 327,500 people to its workforce, a 24-fold increase in its staffing.
Whose employees do you think are happier?
GE vs. AMZN Stock Performance
How did GE stock perform from the end of 2006 to the end of 2016? It delivered a whopping annual total return of 1.9% to shareholders over a decade, one in which the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) returned 6.9% over the same period.
Amazon stock, on an adjusted basis, went from $39.46 on December 29, 2006, to $749.87 on December 30, 2016, an annualized total return of 34.2%.
Bottom Line on GE Stock
I think it’s fairly evident that the job-creation engine that GE once was has long since left the building.
However, if GE stock ever has a hope of recovery, it’s got to forget about cost cutting and start innovating its way out of this hole it has dug.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
