A little thread on growth expectations:

1) Given the increasing focus on “growth stocks” in recent years, thought it would be an interesting exercise to look back at the fastest growth companies by sales over the past decade to put future expected growth rates into perspective.

2) Calculated the growth rate from 2011-2020E (9 yr CAGR) since 2010 could be considered near the trough of the GFC. Many software/internet companies IPO’d over the past decade so don’t have data. I included the annual growth rates if sales data was available for 2012-2014.

3) Here are the list of companies ranked by CAGR.

4) There are ~2,300 companies publicly traded in the U.S. and Canada today with data that far back that had starting sales >$20M.

5) A few interesting notes:
-60/2300 companies (2.5%) had a sales CAGR >35%. As much of the market has come to realize in recent years, an unusually large proportion (>50%) of the 60 high growth companies came from internet/data services, software, and “tech type” companies.

6) An important note is that nearly all of these companies (with the exception of $FB, $TSLA, and a few others) did not have starting revenues greater than $200M from their base.

7) 140/2300 (~6%) of companies had growth >25%. Of the 140 companies, about 1/3 could be considered software, internet services, tech companies. The line between tech/non tech gets blurred since I'm sure more companies have software aspects to their business model.

8) Of these companies with >25% CAGRs, about 30 companies had sales >$200M from their base. It's important to note that the companies that had a higher sales base to start were largely not software companies. They were retailers, insurance, and energy companies.

9) I ran another quick screen. There were 1,830 publicly traded companies that had sales >$200M in 2011. Of these, only 8 had a sales CAGR > 35% and 37 had sales CAGR > 25%.

10) Even better data would be to look at sales on a per diluted share basis to consider the sales growth attributable to long-term shareholders since a lot of the high growth tech names pay management and engineers in stock.

11) Main takeaways: It is rare to be able to consistently grow at very high rates for even just one decade. It is harder to compound at such high rates as the sales base becomes larger (obviously law of large numbers).

12) Again, only 8 companies with starting sales >$200M were able to compound >35%, and only 37 at >25%! If current sales are >$200M, it would be a long stretch to expect a company to compound at such high rates, though there are the few exceptions.

13) Software and internet data service companies have a greater ability to scale to larger numbers much faster, but trying to calculate the long-term CAGRs is very difficult. Growth can decelerate from 40%+ to <20% very quickly once end-markets become more saturated.

14) It is more useful to try and back into reasonable expectations of how big a certain company can get based on potential TAM. Obviously there's a lot of room for error in calculating a TAM but,

15) if you can find a winner take most situation in a space that has a very large market, then the winner will likely compound at a high rate for a longer time.

16) The key is picking who the rare winner is and the durability of their advantage/moat. This also helps back into potential profitability at scale which at the end of the day is the question we’re trying to answer.

17) Not all growth is good growth. Growth at any cost will eventually catch up to a company if they can never scale costs and distribute cash to owners.

18) Companies rarely grow in a perfect line up and to the right. They often can grow in fits and spurts. That's why it’s important to take quarterly data with a grain of sale and look at the multiyear trend.

19) A great example would be $TTD whose revenues can scale up and down pretty fast since it is dependent on ad spend quarter by quarter. The more important factors to consider are; will more ad dollars move towards programmatic ad spend over time,

20) how much and when will those ad dollars shift to programmatic, and how will those ad dollars be allocated?

21) Answering those variables and coming to the conclusion that $TTD will be the primary beneficiary of this huge tailwind is key to understanding the investment thesis. Quarter by quarter sales growth can fluctuate but the long-term trend is pretty clear in our opinion.