Musings On Markets 1

Musings On Markets

While the tales are on different issues, the relevant questions they increase all revolve round the sustainability of growth at these companies, the price paid to create the growth and the partnership between growth and value. The feasibility of growth: With growth companies, the debate about how exactly high growth rates can be and how long growth can be sustained falls along predictable lines.

The optimists argue for high growth and the pessimists argue that this growth is not feasible and traders are caught in the center, wondering which side to believe. Ultimately, though, a company’s growth is constrained by the size of the market where it functions. 1.36 billion in 2010 2010, a sizable market share of the prepared coffee market. 2 billion. While this total revenue does not rely on profits from products like Keurig, it leads me to believe that Green Mountain Coffee is not a “small” company in this market. It is always possible that Green Mountain could increase its products but what are its choices?

Green Mountain maple syrup involves mind, but that is clearly a tiny market; Green Hill chocolates my work, however the premium delicious chocolate brands bring Belgian or Swiss imprimaturs. I believe that is unlikely to occur. Scaling Growth: As companies get larger, their growth rates shall decline. That is indisputable, though great growth companies may be able to slow the decline and extend it over longer periods. And think about this: Google is one of the very most successful growth companies of the last decade. Growth and Value: While many analysts view higher growth as good for value, it is not that simple clearly. After all, choosing a higher development requires companies off make a trade.

On the one side, there is the nice stuff: higher development boosts earnings and earnings. On the other side, you have the bad stuff: development is not free. Growth and Credibility: The best framework for thinking about businesses is a financial balance sheet. Within this framework, this is actually the key difference between older and growth companies. The former derive most of their value from assets in place, whereas the bulk is got by the second option of their value from development resources.

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Since the worthiness of growth assets rests completely on perceptions and objectives about the near future, it also trips on the credibility of management. In other words, you need to trust managers when they tell you their plans for future years and you expect these to be disciplined in following through. If managers aren’t credible and disciplined, the value of growth property can very quickly melt away.

That is the lesson that Groupon and its own investment bankers do not appear to get. As a potential buyer in Groupon, I am not valuing it structured on how much money it made, or lost last year but on my objectives about its future. All the accounting moves made by Groupon over the last year seem to be focused around making their numbers (revenues, income etc.year look better) from last.

Even if they flourish in this endeavor, all they’ll do with these activities is to change the worthiness of their existing property marginally. In the process, though, they have damaged the trust that investors have in them and put the worthiness of their growth assets at risk. When 90% or even more of your value comes from growth assets, that is just dumb.