You Cannot Eat Growth

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History may not repeat, but it seems to rhyme.  I am totally plagiarizing that quote for somewhere, but I am being too lazy to go reference it.

But I feel like I have seen this story before.  And it ended fairly predictably last time.  Lots of publicity around high growth, but unprofitable business.  And asset classes with no inherent earnings power.

Remember, you cannot eat growth.  Growth won’t pay mortgages or tuition.  Or really anything else for that matter.

The focus on growth and sales, for the sake of growth and sales, feels eerily reminiscent of the late 1990’s and early 2000’s.  You can see some of that in metrics like the following:

The only part that seems to be missing is some metric like “eyeballs”.

The concept of scaling a business and taking market share is not lost on me.  However, many of these growthy businesses have no clear answer to when can you stop scaling and focus on driving operating leverage and creating economic profits.  Do not underestimate the operational challenges in turning that corner.

If you were running your own business that was your livelihood, would you prioritize sales growth or cash flow?  Why would you think about investments in other situations any differently?

At some point in the future, more investors are going to be forced to think about that and decide which one matters more – sales growth or cash flow.  

In February, there started to be some pullback in some of the growth oriented names, most evident in the pullback in the NASDAQ 100.

There’s probably no one reason.  However, an increasing focus on future cash flows would be bad news for many of these names.  A change in speculative appetite is a change in the degree to which investors care about cash flows at all — the degree to which they believe that there will always be another person (the “greater fool”) who will pay more for an asset than they did.

Focus on math and fundamentals.  Boring, yes.  A little FOMO, for sure.  But, unlikely to lead you astray.