What a horrific slow down! Sell!
Yes there are rare businesses that produce exponential revenue growth for several years.
But you can still have a very good business with accelerating revenue increases and decreasing YOY% total revenues.
That discussion took place on the Netflix board. Currently, Netflix has a marketcap of 134.55B. Give a example of a +100B company with “accelerating revenue increases” and decreasing YOY% total revenues AND a increasing stock valuation based either on P/E or Price/Sales. That might be a difficult find since MOST of the players in the market tend to value midcap & large cap growth companies based upon some form of YoY growth numbers.
I am aware that all types of people come up with different ways of valuing companies but investors should be aware that they can wind up looking very wrong if their alternative way of valuing a stock differs widely from the valuation conclusion of what most of the rest of the market would be using to value a stock…especially, when it comes to the decision makers that have enough money that their buys and sells move the price of a stock.
Most analysts on Wall street and analysts within major players like Mutual funds, Hedge funds, Pension funds and Sovereign funds do not lack math skills and there is a reason why YoY Quarterly numbers were developed.
YoY Quarterly numbers were developed for comparison purposes to be able to eliminate the effects of seasonality. Even if a company has a seasonally weak quarter, analysts or major investors will look at that as a weak excuse if YoY Quarterly numbers are down in the period because that metric eliminates excuses of seasonality which gets mentioned on Investopedia as a reason why such numbers are considered:
YOY comparisons are popular when analyzing a company’s performance because they help mitigate seasonality, a factor that can influence most businesses. Sales, profits, and other financial metrics change during different periods of the year because most lines of business have a peak season and a low demand season.
Just one instance of “bad” YoY Quarterly numbers would simply be a short term poor health check that can sometimes cause a knee jerk reaction but the numbers become more important when looked at over several years because YoY numbers can show interesting trends.
YoY Quarterly numbers seem to be a big component on how MOST investors in the market judge and value growth companies. Growth companies with large P/E’s or large Price to Sales numbers get awarded their large valuation partially based upon what their YoY Quarterly numbers seem to be doing.
A example of this might be found in comparing Google to Apple.
First look at the YoY Quarterly revenue numbers:
Then look at the valuation history:
Now this would not be perfect because both Apple and Google also get valued on earnings growth, dividends, risks, margins and other intangibles but very loosely as growth companies both Apple and Google get valued based upon their YoY Quarterly revenue numbers.
There seem to be reasons why Apple and Google are valued they way they are and it does not seem to be because of “acceleratingly accelerating” numbers.
If a growth company shows a few years of low and occasionally negative YoY Quarterly revenue numbers (if revenue numbers are being used as the measure of growth) then even if the total amount of revenue is still going up…even if the number is “acceleratingly accelerating” then what we are looking at would be a company that has become more unattractive to growth investors and that stock will likely have it’s valuation lowered which might be why even though Apple puts up huge raw numbers that it currently sits at a P/E of around 17, which by the way is below the S&P multiple of 22. The last time Apple was at a P/E above 30 was at the end of 2007 and Apple has been as low as a P/E of around 8 in 2013.
If one looks at what was occurring with the revenue growth from 2012 to around now, in 2013, Apple began showing minuscule YoY growth even though the overall revenue numbers continued going up and Apple’s valuation got pounded. If people wonder why today that Apple sits at a below market multiple, it might be because currently it’s YOY growth numbers are negative: https://www.macrotrends.net/stocks/charts/AAPL/apple/revenue…
That is why whenever I see someone go on the Apple board and wonder why Amazon has a higher valuation than Apple…well, I just shake my head. There are multiple reasons for the difference in Amazon’s and Apple’s valuation but one of the reasons is YOY revenue growth. Take a look at Amazon’s YOY numbers: https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenu… and Amazon’s YOY growth numbers has been better more often than not than Apple’s for quite some time.
Also, Amazon’s valuation loosely goes up and down in sync with it’s YOY revenue numbers.
Amazon’s YOY revenue numbers last peaked in March of 2018 at 42.92%. Amazon’s last YOY revenue numbers were 16.96% in March 2019. Amazon’s P/E in March of 2018 was around 182. Amazon’s P/E in March 2019 was around 82.
Amazon’s P/E history: https://www.macrotrends.net/stocks/charts/AMZN/amazon/pe-rat…
There are many people very astute with numbers and mathematics but never take the time to learn how a MAJORITY of investors value things. It does not matter if a investor comes up with the most clever way of valuing stocks in the history of man, if other investors choose a different way of valuing things then the “most clever way of valuing stocks in the history of man” has the capability of looking spectacularly wrong, if that method comes to a different conclusion than the way mainstream investors or the majority of investors seem to be using to make buy-sell decisions on stocks.
A investor can make up other alternative measurements to judge companies but unless those methods become popular with MOST investors, especially the large investors that move the price of a stock or unless the alternative measurement syncs closely with few exceptions to the more popular YoY Quarterly numbers measurement (whether revenue or customers or some other measurement) then eventually if a investor invests long enough then such a investor will get wrong footed.
Can YoY Quarterly numbers of a company re-accelerate and a company go back into growth mode?
Why yes, that seems to be happening currently with Zillow https://www.macrotrends.net/stocks/charts/ZG/zillow/revenue but the main reason why growth investors might abandon a stock on seeing YoY Quarterly numbers declining or showing poor trends might be because many companies find it difficult to regain good YoY Quarterly growth once the numbers trend into negative numbers or very low numbers (which seems to be a problem Apple seems to be currently having). Another example of a company that has had a tough time re-establishing good YoY Quarterly might be TripAdvisor https://www.macrotrends.net/stocks/charts/TRIP/tripadvisor/r…
Now, since the discussion that started this thread off originally took place on the Netflix board, the YOY numbers being discussed were not revenues but customer acquisition numbers. Why is that number important? These quotes from a seekingalpha article give a hint:
Subscriber growth is the most important metric to track because Netflix’ success depends largely on the strength of economies of scale it can ultimately reach.
Although it sounds trivial, the size of the subscriber base will ultimately decide the profitability and market value of Netflix.
In short, Netflix has to theoretically hit a certain subscriber size before the company can scale to the point of being both cash flow positive and show a profit at the same time.
Netflix current “miss” on YOY customer numbers currently is just one data point and might be viewed as a “blip” but rest assured that the market will be following these numbers over upcoming quarters and a well established continuous trend of subpar customer numbers will likely lower Netflix’s valuation permanently, no matter if the overall customer growth is still going up.
What Netflix is hoping will happen is that more hit shows like Stranger Things make it’s YoY Quarterly customer numbers start to trend up again like Zillow appears to currently be doing and not bounce around into negative territory like Tripadvisor or Apple has done over recent years.
I think Netflix has a very good chance of bouncing back and the YoY Quarterly customer numbers will likely be viewed in hindsight as a blip but I do think Netflix might be reaching a stage in their development in which growth might come harder for the company and Netflix’s valuation might trend downwards over time from it’s current 121.81 (down from a P/E of 188 at the end of June) https://www.macrotrends.net/stocks/charts/NFLX/netflix/pe-ra…. Declining valuations eventually happens to all growth companies, even the mighty Apple.