Fact or fic­tion: Scott Phillips

The un­der­ly­ing busi­ness, not nec­es­sar­ily the share price, is the thing to watch

Money Magazine Australia - - CONTENTS - Scott Phillips

You’ve heard it be­fore. I’ve heard it be­fore. “If you keep go­ing like that, you’re go­ing to burn out.” There’s only so long you can keep go­ing – work­ing, ex­er­cis­ing, par­ty­ing – at full pace be­fore things start to break down. It even im­pacts the hum­ble pro­duc­tion line: if you don’t shut it down from time to time, for pre­ven­tive main­te­nance, you’re in for a hel­luva dis­as­ter.

But does the same ap­proach ap­ply to com­pa­nies? Or is this one area where you re­ally can keep grow­ing at fast rates, seem­ingly with­out con­se­quence? And, most im­por­tantly from our per­spec­tive, should you in­vest in them, or head for the hills?

The first thing we should tackle is “fast grow­ing” and it’s here we need to make a clear dis­tinc­tion. We’re not – or we shouldn’t be – talk­ing about a fast-grow­ing share price. Af­ter all, the share price only tells you what peo­ple are cur­rently think­ing about a com­pany, and very lit­tle about the com­pany it­self.

Re­mem­ber when lithium stocks were hot. Or graphene? Per­haps you re­call the pot stock craze or, yes, the dotcom boom? You might re­call when Black­mores shares sold for $225 or when Bel­lamy’s traded at over $22 per stub. Those were won­der­ful ex­am­ples of fast-grow­ing share prices but in each case also of record highs that are yet to be re­taken. Or, more sim­ply, of in­vestors get­ting ahead of them­selves.

Speak­ing of the dotcom crash, you

might also know that Ama­zon went from a split-ad­justed $US3 per share to a high of $US100, be­fore crash­ing back to un­der $US8 – a loss of over 90%. But here’s where Ama­zon is dif­fer­ent. From that “crash” back to $US8, the share price shot to over $US2000 ear­lier this year.

Which is, in a neat pack­age, a good ex­am­ple of both a fast-grow­ing share price and a fast-grow­ing busi­ness. Since that $US8 share price back in the early 2000s, Ama­zon’s an­nual sales have gone from $US3 bil­lion to a whop­ping $US177 bil­lion – that’s growth of 29% a year for the best part of two decades.

In­deed, the Ama­zon story is in­struc­tive. Many in­vestors and com­men­ta­tors spent much of those two decades telling us that Ama­zon was over­priced. “It’s not mak­ing money,” they’d say. Which was true – but woe­fully miss­ing the point. Ama­zon was build­ing a strong brand, a loyal cus­tomer base and un­beat­able scale. Those who saw that early have been well re­warded.

Our own CSL is an­other ex­am­ple. While it’s al­ways looked ex­pen­sive, the com­pany con­tin­ues to de­liver strong growth year af­ter year.

And you can add busi­nesses such as Cochlear and Flight Cen­tre to that list. The lat­ter is a par­tic­u­larly good ex­am­ple, given that the long-term busi­ness per­for­mance has been very strong, even if the share price chart looks like a moun­tain range viewed from the side – with plenty of val­leys for good mea­sure.

Scott Phillips is The Mot­ley Fool’s chief in­vest­ment of­fi­cer. He owns shares in Ama­zon. You can reach him on Twit­ter @TMFS­cottP and via email Scot­[email protected] This ar­ti­cle con­tains gen­eral in­vest­ment ad­vice only (un­der AFSL 400691).

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