Some thoughts on (declining) growth

If you’ve spent time on Saul’s board, you would know that high growth is one of the non-negotiable criteria for stocks on this board. This is for good reason. IMO, the faster a company grows, the faster it creates value for shareholders, all other things being equal.

In the past year, I’ve been coming to terms with what kind of revenue growth slowdown is acceptable (and what is not). It doesn’t help that analysts give mixed signals (in my opinion).

For e.g. DDOG’s Q3 of 61% YoY growth followed by a shocking guide of 38% for Q4 was considered great by many analysts on the call, while NET’s Q3 of 47% growth and Q4 42% guide (down from 50+% growth in previous quarters) was punished with a >20% price plunge. Go figure.

Not surprisingly, there has been more discussion on revenue growth on the board in the recent 1-2 weeks. Discussions include the appropriateness of using QoQ number and whether size of the company should be taken into account. Hence I thought it a good time to flush out some thoughts on the subject, using examples that our companies have unfortunately served up.

[Disclaimer: I understand there are factors other than revenue growth to consider when selecting companies. Given the importance of this metric in my own process, I thought it useful to consider it in isolation, if nothing else, just as a first level comparison between companies in my portfolio. All other factors are assumed largely similar in this discussion (which I know is not true). Please take this in mind when critiquing my thoughts below.]

First, absolute growth and change in growth rates. Absolute growth numbers should be a top consideration. A 40% grower will increase in value faster than a 20% grower, ceteris paribus.

However, looking at absolute growth numbers alone is not sufficient. We need to take into account what prior growth was, what it is expected to do going forward, what Wall Street’s expectations are and what is “built into the price” (whatever that actually means). In some respect, the change in growth rates may be as important as the absolute numbers.

For e.g., in 2020-2021, both MongoDB and Hubspot received a huge boost in share price when revenue growth accelerated from 30+% to 50+% and 20+% to 40+% respectively even though absolute numbers were not as high as some of our other hyper growers.

Second, what level of growth decline is acceptable? This is subjective; I think a 10% decline in YoY growth is acceptable but anything more than 20% is not.

For e.g., I am happy to accept NET going from 50+% to 40+% growth but CRWD going from 50+% to low-to-mid 30% worries me. (Both scenarios are not a given but we can only work with the guides we have for now.) As such, following Q3 results, I was happy to add to NET following the >20% price plunge but held back from adding to my small CRWD position.

Third, QoQ growth rates. I think these are important. One Q of poor/strong QoQ growth may not mean much, especially if there’s seasonality. However, 2 consecutive Qs of poor/strong QoQ growth and I may take action, especially if the 3rd Q’s guidance shows similar direction. Where appropriate, I use this as a leading indicator; it can sometimes allow us to act before the YoY numbers show up from lapping a full year.

Fourth, company size. It has been suggested that we should perhaps take into account company size when considering growth rates. For example, CRWD, one of our larger companies by revenues, guided for low-to-mid 30% growth for next FY. A couple posters thought that this was great growth numbers for a company for that size, and I totally agree.

However, this doesn’t mean we need to consider this when selecting stocks for our portfolios. (Otherwise, we could also extrapolate this to consider the mega caps at teens-level growth?) When selecting companies to invest in, the size of the company matters much less to me. Above say $1b market cap, growth rate (and hence rate of value creation) matters much more. IMO, $1 invested in a smaller and faster 40% grower is better than the same $1 in a larger but slower 30% grower.

With the uncertain macro climate, the above are simple guidelines to help in my decision making. Of course, investing is more art than science and there are no hard rules. For e.g., I exited SNOW because I felt the revenue decline was too drastic. It went from 106% growth last FY to an expected high 60% growth this year. It is then guiding for high 40% growth next FY.

However, I now find myself considering re-establishing a position because of SNOW’s greater visibility in revenue compared to other companies, the baseline for next year’s growth has been set, the low likelihood of only 20% growth 2 FYs from now, and I don’t have many companies expected to grow better than SNOW in the coming year.

I would love to hear any thoughts you have on this.



Hi Cedric - these are great discussion points. I would add a few considerations into the mix here - going with your numbering…

Second:- “we can only work with the guides we have for now”
Actually I think we can safely adjust guides by i) declared guidance policy of beating by a certain amount and/or ii) historic beat levels

Third:- QoQ growth rates
Yes these maybe seasonal and that is a consideration but sometimes it can also help factor in YoY compares which might make for a distorted year on year basis and consequent reliance however these can be affected by the pulling forwards or pushing back of revenues which needs to be considered.

Fourth:- company size
Yes this is important and you point out that a smaller faster growing company could be a greater wealth accumulation opportunity than a larger but slower company but offer visibility to forward revenue/revenue growth as a caveat. I would also suggest that you could consider:-

i) Potential left for durable growth with regards to penetration of the total addressable market

ii) Relative growth rate at scale vs equivalent points of the life cycle of historical analogs such as Salesforce, Google, Amazon, ServiceNow etc

iii) To what degree a company has made or is making progress on operating margin and free cash flow

iii) Dare I say relative valuation using a valuation metric comparison

I might add a fifth consideration:-

Fifth:- Ability to re-accelerate. This could come from:-

  1. Underlying growth mechanics - such as MDB’s emergence of Atlas as a dominant faster growing part of the business or the Fintech portion of MercadoLibre overtaking eCommerce or internal go to market model, customer segments shifts or existential agreements reached such as Global e online’s deal with Shopify or ZS and FedRamp.

  2. Macro demand drivers - such as Datadog’s short term impact and re-acceleration during covid or the possible re-acceleration of consumption post this current climate

  3. Growth accretive acquisitions - potentially for example



Hey Ant,

I agree with most of your points.

I’ve seen folks trying to do this, like compare S1 and CWRD when they were at similar revenue sizes. I’m not sure how this will help in the investing process. How S1 is doing now vs how CRWD was doing 2 years ago is irrelevant to how I allocate capital because I can’t go back in time to allocate to CWRD 2 years back.

Say I find that S1 is now performing worse than what CRWD was doing 2 years back at a similar size. Then what?

What I should be doing is consider S1 on its own merit and compare it to the other companies in my portfolio at this point in time, then make my allocating decision from there.


In the past year, I’ve been coming to terms with what kind of revenue growth slowdown is acceptable (and what is not). It doesn’t help that analysts give mixed signals (in my opinion).

For e.g. DDOG’s Q3 of 61% YoY growth followed by a shocking guide of 38% for Q4 was considered great by many analysts on the call, while NET’s Q3 of 47% growth and Q4 42% guide (down from 50+% growth in previous quarters) was punished with a >20% price plunge. Go figure.

One confounding factor here is that Datadog’s last 3 quarter beats have been (starting with the most recent quarter): 5.4%, 6.9%, and 7.1%, while Cloudflare’s have been 1.2%, 3.1%, and 3.0%. So you could make the case that a 38% guide for Datadog implies faster growth than a 42% guide for Cloudflare. You should also look at QoQ (as you mention) – it might tell you more than YoY.

But the more important thing to consider is what is expectations for next year and beyond. That is always playing into the current price. I would argue that the reason Datadog is down isn’t because they guided to 38% next quarter (because it was already down before they gave that guide). It has fallen so much this year because of macro, but also because in 2021 it was priced as if:

  1. it would grow at 60%+ this year, which it will.
  2. that it would do close to the same in 2023, which now the market has correctly realized, it won’t.

That was the reason for the repricing, methinks. But that happened long before we got the guide for Q4. It’s been happening all year.

So if you are going to look at revenue growth in isolation, even as a first step, you have to make sure you are looking forward pretty far. The market is always a discounting machine baking in predictions (though the future is unknowable) for years in advance. We’ll do well if we can discern the market’s expectations, and bet on companies where the expectations are too low. As you say, that can be an expected 20% grower which will actuallly grow at 30%. But I think most of the time (but not in 2021) it’s easier to find expected slow downs that don’t slow as much as the market expects. As I said above, in 2021 the market was likely not pricing in enough slow down in 2023 for Datadog. But in 2019, the market probably didn’t expect Datadog to still be growing at 60% in 2022. That’s why the shares were trading around $40 back then.

At present, I believe the drivers that will lead Datadog to stay above 40% revenue growth in 2023 are there…and so that is my expectation. My guess is that right now the market sees a little less for Datadog in 2023, and then not slow down much from there in 2024. If at any point the market starts to see signs that I might be right, Datadog will probably go up. If the market sees signs that I’m wrong and it is right (or gasp, even too optimistic), Datadog will not go up and could drop further.

Regarding Cloudflare, I think it’s a similar 40%+ for the next several quarters…I’m just not sure I feel as strongly about it, or about 2024 and beyond. But I like NET too.



Hi Cedric - good point on not having a time machine however I still think there is utility in this in terms of:-

  1. Understanding how above / on track / below a current investment opportunity is versus a preceding analog trajectory helps you be better informed about the expectation and the risk you are facing.

  2. Also it might help you compare between 2 current investment opportunities that might be facing a growth rate decline but are themselves at different points of their respective lifecycles - comparing both back to analogs could help in that decision.

Of course it is one element of several options you could consider alongside the other approaches suggested and I get that it could get distracting if analog analysis is used to make binary choices merely comparing against historical data points rather than being used to inform on making better decisions.

(I find it useful where available but I don’t perform this analog analysis as a routine.)