Below is a link to an article I believe every member of this board will find useful. I have to think it has already been posted here because it is so relevant but a search for “grow fast or die slow Saul’s site:fool.com” did not yield any hits (for me).
https://www.mckinsey.com/industries/high-tech/our-insights/g…
The article does not directly address your question “Which companies do you think can grow the fastest for the longest?”.
Instead, it provides justification for why your question is THE most important question to ask. The article summarizes research findings from a study of 3,000 software and online-services companies conducted by McKinsey aimed at understanding the factors that predict sustained growth rates (i.e. your question). A few of the most relevant findings are outlined below (all of this is specific to software companies):
- Revenue growth is the best predictor of future growth and also shareholder returns
- Software companies with 2-year revenue CAGR >60% when they hit 100 MM in revenue (“Supergrowers”) were 8x more likely to reach 1 BB in revenue than those growing <20% at 100 MM
- Improvements to cost structure and return on invested capital are not nearly as important (no correlation was found between cost structure and growth rates)
- Software companies with 2-year revenue CAGR <20% produced on average -10% to -18% in returns for shareholders (not sure if 10-18% is a CAGR or total return over some time frame)
- 85% of “Supergrowers” were unable to maintain their high growth rates (defined as >40% once they reached 1BB in annual revenue) and once lost, less than one quarter were able to recapture them (and even if they did, they went on to create less shareholder value than companies who maintained consistent growth, which are extremely few e.g. Amazon, Tencent, Saleforce, Adobe)
- Supergrowers generated 5x the shareholder returns then “growers” (where growers are defined as two-year revenue CAGR between 20% and 60% at 100 MM and between 10 and 40% at 1 BB)
Much of this rings true to the lessons in The Knowledgebase, and the methods used here (e.g. cut bait if revenue growth drops below 40% or so).
There are a ton of other goodies, and some more nuance so make sure to read the article. One section with particular relevance to this thread is titled “There is a recipe for sustained growth”:
- Sustained growth happens in three stages: prelude, act one, act two
- Growth in act one is driven by five factors: market, monetization model, rapid adoption, stealth, and incentives
- Growth in act two is driven by different factors than act one, namely an expansion to new geographies or channels, new product markets, or transforming into a platform
One criticism I will offer is that the findings are backward-looking. If sustained growth is dependent on a successful transition from act one to act two, what good does that do us as we sit watching while act one unfolds? Maybe the takeaway is that the best approach to answering Bear’s question is to collectively put our heads together on each company and ask the question: Does this company have an act two? Or do we cut bait once we think act one is nearing completion? Based on the probabilities outlined in the article, I think the answer is “cut bait”, as is often espoused on this board. Nonetheless it may be worth quantifying each company in terms of the metrics used in this article to see how they stack up and potentially gain some insight into whether we think the company will have sustained growth (something I will work on).
Finally, some of the discussion on this thread is aimed at debating whether we should focus squarely on the growth rates or try to discriminate qualitative factors that might drive sustained growth. The findings in the article seems to imply that the growth rate itself may provide that insight.
https://www.mckinsey.com/industries/high-tech/our-insights/g…
Guy