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Deep-Dive

Intro

You’ve probably heard it said that revenue growth is the lifeblood of a business. And let's be honest, it's easy to get caught up in all the hype surrounding rapidly expanding companies. After all, who doesn’t love a good success story about a company that started from zero and then exploded onto the scene?

But while it’s exciting to watch a company’s revenues soar, it’s also crucial to understand what’s really driving that growth and, more importantly, if that growth is sustainable.

Today, let’s dive into the revenue growth!

THE KEY TO IDENTIFYING TOMMOROW’S WINNERS

When we talk about revenue growth, we're looking at the increase in a company’s sales from one period to the next.

Simple, right?

But here's the thing: not all revenue growth is created equal. Some companies grow their top line by expanding into new markets, launching new products, or increasing prices. Others might benefit from favorable market conditions or even one-time events. The key is to discern which of these factors are at play and whether they can be sustained over time.

Imagine a tech startup that just launched a revolutionary new product. The initial sales might skyrocket, leading to impressive revenue growth. But what happens when the excitement dies down, and competitors catch up? If that company doesn’t have a plan to maintain its momentum, those growth numbers might plateau or even decline.

Taking the example of WeWork (and two of its real estate development rivals, LuxUrban and DigitalBridge), which grew quite rapidly, the decline in revenue was just as dramatic:

With very low growth rates that came close to 0 until the company filed for bankruptcy, WeWork is suffering from poor management. When sales are growing, it's important to ask the right questions and not jump at the chance!

THE QUALITY OF GROWTH MATTERS

You might be wondering, “Isn’t any level of growth good growth?” Well, not exactly.

High revenue growth can sometimes mask underlying problems.

For instance, a company might be growing its revenues by slashing prices, but that can hurt profitability in the long run. Or, a business could be acquiring new customers at a rapid pace, but if the cost of acquiring those customers is too high, it could erode the company’s margins.

Just take a closer look at how the growth is being achieved. Is the company adding value for its customers, or is it just relying on short-term tactics?

Sustainable revenue growth often comes from a business’s ability to innovate, improve efficiency, and build strong customer relationships. When a company has a solid foundation, its growth is more likely to be consistent and reliable!

Let’s take a look at some of the key drivers of revenue growth before also learning how to discern if revenue growth is sustainable. Thinking about company efforts to balance revenue growth vs profitability is also going to be key. We’ll use Microsoft and Netflix as an example. All of this will aid you tremendously in evaluating growth opportunities within your investment analysis. Read more below…

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