the new importance of sequential growth?

As earnings season gets going, one thing I’ve noticed (perhaps belatedly) is that we can, for the first time, start to see post-pandemic growth patterns. That is, Q2 and Q3 were both pandemic quarters, and for a given company if Q3 vs Q3 2019 is very strong, while Q3 vs Q2 2020 growth is mild, then we may have a stock that is a 1-time pandemic beneficiary vs a stock that will have ongoing post-pandemic growth. Cases in point that have reported recently:


REVENUE GROWTH RATES
        Q3 YoY    Q3 vs Q2 seq    seq^4
ETSY    128%      5%              22%
LVGO    118%      15%             75%
SHOP    97%       7%              31%

I know that seasonality potentially complicates this picture somewhat. But that aside, if I look at ETSY, 5% annualized (1.051.051.05*1.05) is something like 22%, which is a far cry from 128%. So massive deceleration ahead. But LVGO… 15% annualized is 75%, so none too shabby.

Is that a sensible way of looking at things, assuming a given business doesn’t typically experience a lot of seasonality from Q2 to Q3?

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Worth pointing out that two of your examples are indeed extremely seasonal - LVGO launches most of its contracts and partnerships in Q1, and ETSY is heavily geared towards the holiday season (its Q1 results have been lower than Q4 the past 2 years)

My personal thoughts on this is that it first depends on the seasonality of the Company as you pointed out, and it’s worth going back at least 8 quarters to see if there’s a pattern to the revenue growth rates.

Secondly the current absolute growth rate of the company matters. If YoY rates are in the 60%+ range, I would give leeway for a quarter or two if the sequential gains aren’t annualizing to large numbers, management has to paint a good picture of why the pipeline isn’t something to worry about.

Sometimes companies could be closing large clients due to (scary word) a long sales cycle, so this must materialize within the next quarter or two (we’ve seen a lot of examples now where it doesn’t). Other times your base business could be firing on all cylinders but you’re losing a large client (TWLO with Uber at the end of 2017, FSLY with TikTok currently) - in that case you’d have to evaluate what the chances are of the business catching up, has the bad news been priced in, etc. For example, I would be invested in FSLY if it was $30, but not at its current price since it had run up so quickly already this year.

Last thing that’s important to me but not so much to others on the board is relative valuation and what the market is implying with its valuation. ETSY as an example - the current valuation implies that the market believes the revenue growth rate is a one time pandemic bump, at 10 P/S (current quarter sales) - compare this to right after ETSY reported Q4 2019 earnings - they were valued at about 7B on 1B annualized sales or 7 P/S or right after Q3 2019 earnings where the ratio was a bit above 8 P/S.

The lack of serious increase means the market is already discounting that the growth will continue past this year. MELI is another marketplace company that’s 4x ETSY’s size and is at 16 P/S, so I’m betting that ETSY will continue to grow at a higher clip than their previous 30% rate and the stock will multiple based on both growth and multiple expansion as a result of the market giving them credit for sustained growth

Point at the end is it’s hard to only look at raw numbers, you have to take into effect the story and how the market is behaving too

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I’ve been thinking about this a lot. In fact I just mentioned it in my last post about Shopify. I’m sure each company will be a little different but we are all going to have to figure out how to view the last couple of quarters in some sort of discount mental model.

  • Next year we will have interesting year-over-year effects
  • This quarter and next we will have to think about business that might have gotten pulled forward and when you throw seasonality in there is another factor to smooth out.

Looking at what I just posted in the Shopify thread and bringing it in to the context of this thread…


            Projected | Current
Quarter:	Q4'20	**Q3'20**	Q2'10	Q1'20	Q4'19	Q3'19	Q2'19	Q1'19	Q4'18	Q3'18
Revenue:	975	**767**	714	470	505	391	362	320	243	270
Change:  	208	**53**	244	-35	115	29	42	77	-27	19
YoY:    	93.0%	**96.4%**	97.3%	46.9%	107.9%	44.7%	44.2%	49.5%	42.1%	78.8%
QoQ:    	27.1%	**7.4%**	52.0%	-7.0%	29.3%	7.9%	13.1%	31.7%	-10.0%	7.6%

…my projection was a quick thought process like: Well before the pandemic they grew in the mid 40%s but Q4 is seasonally stronger and QoQ they do around 30% sequentially. If they do that again, in real dollars it is a lot more money, so maybe back off that a little. Enter “975” and look at the QoQ and that looks kind of right. Hey look that is 93% YoY which is in the ballpark we are seeing these couple of quarters. I sort of think that should be higher with the holidays involved so I’ll call this conservative.

…so nothing super deep or complicated here. Just trying to reason through past numbers versus the very-recent-past numbers to come up with…something. It seems to me like the market viewed this report as on par with expectations since there was no pop. Maybe the market is already doing some of this thinking and looking at both YoY and QoQ to try and arrive at something logical? Perhaps the tough comparisons I worry about next year will be something we simply live through and it will all work out without much fuss.

How are you guys thinking about the potential for complicated comparisons moving forward? Does anyone remember what it was like in the quarters following ~Feb 2009?

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…you know, I never posted my reply to the Shopify thread, so I’ll let this be it. By the way they didn’t offer guidance so projections are the best we can do.

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