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

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

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. 

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

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.

Latest Updates

Economy

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.  

Retirement

Navigating the next stage of life in retirement

Retirement planning is more than just saving enough money. Long-term care needs, housing choices, and social networks are just as critical for a happy and enjoyable life.

Strategy

Showcasing your value in the age of AI shortcuts

Knowledge is becoming commoditized in the age of artificial intelligence but experience, taste, and judgement are still at a premium.

Planning

Financial advice as the pathway to economic security

Financial advice can lead to improved financial literacy, a healthier super balance and a higher standard of living in retirement. Is now the time to give yourself the gift of financial advice?

Economy

The overlooked driver of energy inflation

The impact of energy policy on inflation in Australia is often overlooked. Transitioning to renewable energy can lead to inflated costs that affect the entire economy and productivity growth.

Economy

A 2026 rotation story: Europe’s undervalued small caps

In 2026, Europe is poised for a 'Goldilocks' scenario with cooling inflation and lower rates, driven by fiscal stimulus. Small caps offer an attractive entry point before capital rotation.

Investment strategies

What we do when things go up (a lot)

Recent price spikes, particularly gold's surge, trigger behavioral responses like availability bias, storytelling, extrapolation, and FOMO, which create self-reinforcing feedback loops influencing investor sentiment and market trends.

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.