Back towards the mid part of the year a lot of us were noticing that the search for growth was taking Saul and many of us towards investing in pre-profitable situations. At odds with the rules, guidelines and philosophies of the board’s growth investing in profitable situations driven by PEG type analysis and raising uncomfortable memories of the dotcom era.
This last set of quarterly results has helped ease my concerns and certainly re-assures me of the choices we are making.
If you consider the profit journey there are several critical milestones that certainly I look out for and track that provide useful progress markers on how companies are progressing.
Typically the journey might include the following generic stages (leaving aside pipeline industries like drug R&D and oil/gas/mining exploration):
Hyper revenue growth with a lot of sclerotic at best or deteriorating metrics - (your classic dotcom era of burn rates where hope and fear are the investment strategies)
High revenue growth rates with an improving set of metrics - (high risk investing based on belief that growth rates will continue to last out as metrics eventually turn positive)
High revenue growth rates with improving metrics and trading in an operating cash flow or even better free cash flow positive position - (Lower risk of funding liquidity issues and a strong validation of sustainable business viability)
High but potentially decelerating revenue growth rates reaching non-GAAP positive operating margin and positive non-GAAP net inc per share breakeven - (de-risking the stock but probably not yet growth at reasonable price)
High but potentially decelerating revenue growth rates demonstrating operating leverage with outsized gains in non-GAAP net inc per share (low risk very high return wonder stocks that we are all looking for -
High but potentially decelerating revenue growth rates reaching positive GAAP operating margin and GAAP net inc per share (Blue chip and accounting promised land type situations - CheckPoint, Microsoft, LGI Homes etc)
Let’s leave it there and not worry about low growth, high yield or decline situations which isn’t the focus of the board (IBM etc).
Ok what I’m pleased to see taking place in the Q3 and Q4 results is how so many of the higher risk, adventurous and pre-profitability Saul method stocks advancing through the stages - very encouraging for those of us worried about being left high and dry at the end of the bull run with a bunch of loss makers…
We have seen:
Moving from 1-2:
Moving from 2-3:
Moving from 3-4:
Moving from 4-5:
Moving from 5-6 and staying in 6 without growth deterioration:
The Trade Desk
There are probably others worth mentioning as well but these stand out to me.