The Accountant 2

In the 2016 action film, The Accountant, Anna Kendrick's character, an accountant, asks Ben Affleck's character, The Accountant, "How did you, um, get into financial consulting?"

Ben replies in the most accountanty way possible: "Department of labor statistics indicated it's one of the fastest growing professions." Cold, ruthless logic. Ben's character is also autistic with the logical ease and social challenges that come along with that.

For her part, Anna got into accounting for "the balance of it. You know, I like finding things that aren't obvious."

It's an action movie. *Most* real forensic accountants don't mount miniguns in their living rooms. Most real accountants wouldn't be caught dead using "EBITDA" to measure profit.

The exchange highlights one tension of accounting: between rules and uncertainty. Accountants really like rules and certainty. In another exchange where a Director of the company Ben's character is investigating asks him to guess who cooked the books, Ben replies "I don't guess."

Accountants come up with a lot of rules about how to treat certain things about a business so they don't have to guess. But there are also still a lot of puzzles in accounting — things that aren't obvious.

One of these is when companies research and develop products that won't sell until the future. Accounting rules say that expenses should match revenue. But when a company’s spending money on something it’s not selling yet, it's hard to figure out exactly when that should run through the P&L. Accountants "don't guess," and the CYA approach is to run it all through when companies spend it. So that's what they do.

Bridge the GAAP

Lamplighter’s talked about the gap that opens when companies make "investments" like research and development through their profit and loss statement. Like the soon to be released The Accountant 2, this is a sequel to Lamplighter’s “The Treachery of Profit.”

Management professor Michael Mauboussin provided a good template for how to deal with mismatched revenue and expenses. His prescription shifts R&D expenses and sales and marketing expenses to better match revenue.

For many companies, it doesn't matter that much. For a software company, say, ChatGPT, it can write a bit of code over the course of weeks or months and ship it to users a little while later. Its already on GPT4 since its first public release near the end of 2022. Users benefit from the software over time, so expenses would better match the business over time. The cycle is fast though and most of its expenses come when users click “search” or “reason” or “deep research.” A lot of its R&D expenses already fall in line with when they're used.

What about an industry with a lot of R&D and a much longer product cycle? What about semiconductors?

Rambus, a computer memory subsystem outfit, introduced eight new products in 2024. It’s never brought this many products to market before. Those products will make up less than 10% of revenue by the end of 2025. And that's fine. Product ramps in semiconductors are slower than software.

Management first announced all these new products back in 2022. That means the R&D spending that ran through Rambus' P&L back in 2022 or earlier won't start to match revenue until at least this year, 2025.

Lamplighter uses Mauboussin's roadmap for adjusting R&D and sales and marketing expenses to figure out how the real economics of the business shake out. The operation boosts Rambus' operating earnings 10% higher than what accountants showed for 2024.

There's more to come. Today, Rambus is spending for its next batch of products. The earliest these new products will generate any revenue is the second half of 2026. And those expenses are running through its P&L today too.

The analysis takes Rambus from a company that looks like an OK deal at its current price and that grew its product business by — checks notes — 50% in the most recent quarter, to one that looks like a really good deal.

It’s not obvious

For ChatGPT and most other companies the Mauboussin shuffle isn't the most useful framework for evaluating their activity. For companies that are spending heavily on R&D, but don't have any revenue — venture businesses — it's also not that useful. Those aren’t "businesses" yet, just expenses. Because its usefulness is limited for so many situations, many investors aren't thinking about companies like this. It’s not an obvious tool.

But for some situations — for companies whose revenue and R&D fall years apart — for companies developing products in partnership with their customers — for companies where those products will represent a meaningful slice of the business — the exercise provides sharp insight. For Rambus it highlights profitability the market has, so far, not appreciated.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.