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Many investors believe they need some type of highly differentiated insight to generate great returns in the market.
This can be a source of returns, but in my view doesn’t have to be. More below
This can be a source of returns, but in my view doesn’t have to be. More below
1/ There are two types of key bets that growth investors make –
A) New product adoption or inflection
B) Growth durability
A) New product adoption or inflection
B) Growth durability
2/ Correctly calling new product adoption or inflection is hard. There are exceptional investors that do this well. But this often requires decades of experience and pattern matching.
Fortunately, growth durability is a (relatively) easier bet one can make. Some examples:
Fortunately, growth durability is a (relatively) easier bet one can make. Some examples:
3/ Visa and Mastercard have largely unchanged business models over the last 10 years. Card penetration was just under 30% in 2010. That has grown to ~50% by 2020.
As an investor, you underwrote that more transactions every year would become carded under their brands.
As an investor, you underwrote that more transactions every year would become carded under their brands.
4/ Over the last 10 years (2010-2019), Visa/MA have >3x revenue, ~7x profits, and investors have roughly ~10x their investment (25-30% IRR).
S&P has roughly ~3.5x during this same period (~13% IRR).
Consensus expects Visa/MA revenue to continue growing 10-15% annually.
S&P has roughly ~3.5x during this same period (~13% IRR).
Consensus expects Visa/MA revenue to continue growing 10-15% annually.
5/ Facebook is another one. They went public in 2012 with ~$5B of revenue and ~1B users. Today they have ~$80B revenue with 2.7B users.
While there was initial pain in 2013 as FB made their transition from desktop to mobile, the fundamental business has been similar since.
While there was initial pain in 2013 as FB made their transition from desktop to mobile, the fundamental business has been similar since.
6/ As an investor you underwrote FB to grow users, engagement and monetize via ads.
Revenue and profits have both >15x since IPO (2012-2019). An initial investment would have >5x in 8 years which is ~25% IRR.
Consensus projects revenue to continue growing 20%+ annually.
Revenue and profits have both >15x since IPO (2012-2019). An initial investment would have >5x in 8 years which is ~25% IRR.
Consensus projects revenue to continue growing 20%+ annually.
7/ Final example is Adobe. Majority of business is selling software to designers (e.g. Photoshop).
ADBE has gone through a subscription transition, but just a few things truly matter as an investor – that they could 1) grow the install base, 2) upsell product, 3) raise pricing.
ADBE has gone through a subscription transition, but just a few things truly matter as an investor – that they could 1) grow the install base, 2) upsell product, 3) raise pricing.
8/ Over last 10 years (2010-2019) ADBE has done exactly that, resulting in 3-4x revenue, >5x profits, and investors have 9x their investment (~25% IRR).
Consensus projects revenue to continue growing ~15% annually.
Consensus projects revenue to continue growing ~15% annually.
9/ In all these cases, revenue & profit growth have been the key driver of returns.
As an investor you didn't need to underwrite a new business or product intro. That's a hard ask.
As an investor you didn't need to underwrite a new business or product intro. That's a hard ask.
10/ Instead you bet on growth runway. This involves understanding TAM, business quality, pricing power, network effects.
Still requires hard work & good analysis. But much easier ask in my view.
Very powerful and can generate outsized returns.
Still requires hard work & good analysis. But much easier ask in my view.
Very powerful and can generate outsized returns.
** This is NOT investing advice for any of the stocks mentioned. Above is historical analysis.
Returns calculated through end of 2019 to exclude impact of covid
Returns calculated through end of 2019 to exclude impact of covid
