Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 409

Single-period measures do not work for great growth companies

The growth versus value dichotomy lies in plain sight, as broad market indices such as the S&P 500 have outperformed the tech-heavy NASDAQ in recent months. These gains are in contrast to movements in calendar 2020 where tech ran strongly ahead. Investors of both persuasions are wondering whether the price of growth companies has largely been captured with value companies yet to fully reflect the 're-opening trade' as vaccinations increase, borders reopen selectively and airline bookings pick up.

We think not. Earlier this month, the Wall Street Journal published the following chart with accompanying commentary, of the quite mind-bending revenue growth numbers produced by the disruption giants in the March 2021 quarter, relative to the same period last year. These numbers show a pattern of growth accelerating coming out of the COVID year.

Remember, this group picked up steam even as COVID hit. A fall in revenue growth could have been expected as the world began the slow climb to recovery.

Doing well, even in a pandemic

These companies are recording (for the most part) their strongest quarterly revenue growth in five years. Microsoft chief Satya Nadella, on the most recent earnings conference call, said:

"Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning. We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.”

But the share prices of these stocks did not rise following these blow-out numbers - indeed a couple fell. In truth, they mostly rose in the weeks leading up to the results, so perhaps no further lift on the result was to be expected.

Meanwhile, there is no doubt that some of the beaten-down value players are enjoying their period in the sun, as the chart below on growth versus value shows.

Our caveat is that this value resurgence should be regarded with some circumspection. Take for instance the European car makers. On the one hand, Volkswagen, the largest car producer in the world with production of over 10 million vehicles annually, has fully embraced the electric vehicle, committing to the virtual phase-out of internal combustion engines entirely within a decade. It has been reported that VW's admittedly smaller rival, BMW, has not committed to the electric switch, with the BMW board against it because the margins are lower than for the ICE cars. Frustrated innovative, creative, and smart engineers left BMW, partly founding their own battery electric vehicle startups in China or the United States, it has been widely reported.

Traditional valuation methods do not apply to strong growth stocks

In our view, there are value (lowly-priced) stocks, and there are value companies which have a plan for the future, and they are different. Disney is in the latter group, moving from a model in which it relies on cable companies to sell its programming in favour of a streaming service like Netflix.

Kodak is an example of a value company which failed to adapt, and so never realised its value promise.

The key is a systematic approach to valuation. We apply a multi-year discounted cashflow valuation process, designed to capture shifts in business strategy (positive or negative). We do not use single period measurement tools such as P/E or EV/EBITDA but consider the likely cashflows looking out over a number of years. This allows us to understand the prospects of the giants mentioned in the Wall Street Journal article as well as many other companies that we expect to be household names in the future.

For example, we have held Xilinx, Nvidia and Qualcomm for over three years as our expectation of the companies' valuation has emerged and the share prices rocketed. The earnings power of these companies cannot be assessed using single period measures.

The process is also useful in assessing the valuation of companies which are moving from loss to profit. We hold a small number of these companies because we consider that their growth potential is significant (meaning global). Netflix was only barely profitable when we initially opened the position yet this quarter announced a US$5 billion buyback of stock.

There are some years to go before Netflix reaches our future valuation of the company. Similarly, with the other FAANG companies (Facebook, Amazon, Apple, Google) we see multi-year growth paths for these companies.

It also helps us to screen out companies which have deep-seated problems which are not being properly addressed by management, notwithstanding how good their earnings may be in any given period.

 

Alex Pollak is Chief Investment Officer and Co-Founder of Loftus Peak. This article is for general information only and does not consider the circumstances of any individual.

 

  •   26 May 2021
  • 2
  •      
  •   

RELATED ARTICLES

Reece Birtles on selecting stocks for income in retirement

Irrational exuberance in growth versus value

Is FOMO overruling investment basics?

banner

Most viewed in recent weeks

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

Latest Updates

Superannuation

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

Economy

Central banks need higher inflation targets

In a shift away from solely targeting low inflation, central banks are considering raising inflation targets to combat economic challenges, but face potential drawbacks and conflicts in policy implementation.

Exchange traded products

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Latest from Morningstar

Alpha isn’t dead. You’ve just been measuring it wrong

New research shows smarter portfolio construction—not new factors—is the real edge in the hunt for alpha. However, finding it requires a fundamentally different mindset.

Investment strategies

The diversification illusion: why 'balanced' portfolios may be exposed

Many 'diversified' portfolios are increasingly driven by the same narrow set of forces. As concentration builds beneath the surface, understanding how portfolios behave - not just how they’re constructed - is critical for investors.

Investment strategies

The case for staying the course in credit

Rising oil prices and inflation pushed Australian yields higher. Markets expect further tightening, but weaker growth may reverse rates. Locking income and maintaining duration is a sound strategy for widening credit spreads.

Investment strategies

One risk after another

Investors often focus on front-of-mind risks, reacting to each headline event without considering long-term impacts. Cass Sunstein and Timur Kuran define this as an "availability cascade," affecting financial decision-making.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.