Company Size and Growth

High Growth Adrenaline

Like a spacecraft that picks up speed as it rises into the Earth's stratosphere, growth stocks often seem to defy gravity.

The more the stock has gone up, the more it seems likely to keep going up. But that instinctive belief is flatly contradicted by a fundamental law on financial physics.

The Bigger they get, the slower they Grow

A $1 Billion company could double its sales; but where can a $50 Billion company turn to find another $50 Billion in business?

This is a case study mentioned in the book The Intelligent Investor.

In Feb 2000 CEO John Roth of Nortel Networks was asked how much bigger his giant fibre-optics company could get. “The industry is growing 14% to 15% and we are going to grow six points faster than that’’ Nortels stock up nearly 51% annually over the past 6 years was then trading 87 times what Wall Street was guessing it might earn in 2000 (The CEO justified by saying that Cisco systems was trading at 121 times its projected earnings)

These growth companies tanked and their overpriced stocks shrivelled. Nortel's Revenue fell by 37% in 2001 and the company lost more than $26 Billion that year. Nortel's stock was at $113.50 in 2000 when CEO Roth spoke but, finished at $1.65 in 2002. Cisco’s shares at $52 when Chambers called his company ‘’breakaway’’ and insisted it would grow at least 50% annually crumbled to $13. In the same context, we looked at some stocks in India that are market giants like - HDFCBANK, and INFOSYS.

While these companies grew at a fast pace (more than 30%) in their early stages, they now grow slower as their market cap has increased exponentially.

TATA ELXSI is a contrasting example of high growth compared to INFOSYS. However, will this growth rate be sustained as its market cap increases?

About the Author

Rohan Borawake is a SEBI Registered Investment Advisor and Finance Writer dedicated to providing valuable insights through his blogs and articles, catering to both everyday individuals and investors.

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