THE PRIMACY OF REVENUE GROWTH Having grown up as a Tiger-style investor, one of the lessons that sticks with me the most is the value of revenue growth. As an impressionable 24 year old analyst, I will never forget Steve Mandel from Lone Pine telling our analyst group a simple but powerful truth - sustained structural growth is (almost always) chronically underpriced in the market, and sustained secular decline is (almost always) chronically overpriced in the market. In a market ecosystem keyed on P/E ratios, investors will get the proper P/E range directionally correct but will miss on magnitude. Don't take my word for it. A simple 30-year DCF architecture structured to sensitize revenue growth will display this truth. To simplify a complex reality, here I take revenue of $1m at T0 and hold 10% operating margins, 6.5% FCF margins, 35% debt/EV (5.5% interest rate), 10x terminal multiple at year 30, and an 8% WACC in all cases (which is generous to the decliners as usually revenue has beta to margins both ways). What stands out to me on this chart is how much more a 10% grower is worth than a 5% grower - roughly double in P/E ratio terms. This math shows that companies that can grow 10%+ on a sustained basis should have a floor P/E of roughly 30x, and companies that cannot growth revenue should trade with a 10x P/E ceiling. In my observation, this simple math explains one of the biggest philosophical differences between the Tiger-style long books and classical value investors where the value trigger tends to be low multiples on current year earnings. Let's pick on Buffett for a minute. Two of his largest holdings have been BAC and AXP. These stocks have been "cheaper" than the market historically trading ~11x and ~14x, respectively. V, in comparison, has seemed "more expensive". However, with perfect foresight, we can see that V's meaningfully superior revenue growth rate is "worth" a P/E over 40x. Price is what you pay, value is what you get. V has been demonstrably the cheaper stock over the last 15 years (and as such, a vast outperformer vs. BAC & AXP), despite never looking optically cheap on a near term P/E basis. Certainly the pushback to this mindset is "well, hindsight is 20/20". In aggregate and over long periods of time, it pays to bet against the durability of double digit revenue growth. Almost always, the "next AMZN" is not the next AMZN, and investors can fall into survivorship bias here. As the base grows, sustaining 10%+ gets mathematically more difficult. And the market tends to extrapolate these levels of growth, such that top line decelerations are usually painful events with a twin smackdown of revenue misses and de-rating lower (this is a key short alpha hunting ground). I don't dispute that. What I would suggest is that one of the most powerful insights that a fundamental investor can reach is conviction in the next durable growth story. Applying your idea generation & due diligence process to uncovering the next business that can sustain 8-12% revenue growth for 10+ years is, in my opinion, one of the more broadly fruitful approaches and an enduring lesson that the Tiger investment community has taught us. And even in a hyper competitive institutionally driven market of quants & pods, my observation is that the market still hasn't gotten this message on its chronic mispricing error. Hope that is helpful! Brett<img src='https://pbs.twimg.com/media/F98Uh0nbMAAf453.png'/><img src='https://pbs.twimg.com/media/F98WZsEbsAIGz93.png'/>
