15-Minute Fundamentals: Growth Metrics

Austin Hankwitz: Happy Friday, happy Friday. I'm so excited to be doing this with you. Well over 300 of you are tuned in I'm seeing Bryce I'm seeing Suzy, Mike, Tracy, Terry, Joseph, thank you all so much for hanging out with us on this Friday. My name is Austin Hankwitz and welcome to 15 minute fundamentals on Public Live.

Austin Hankwitz: In this show we break down investing strategies and concepts so you can be a better investor. Again, I'm your host Austin Hankwitz and I create personal finance and investing content online mainly through TikTok. But however, I do have a degree in finance and economics, and I did mergers and acquisitions for a publicly traded company for a few years out of college. So, long story short, I'm a super nerd, and I embrace it. As a reminder, this show is for educational purposes only. And this is not direct investing advice. Many of the metrics we'll cover today and in these shows are available as part of Public Premium, which gives you more ways to level up your portfolio. You can learn more about Public Premium at public.com/premium.

Austin Hankwitz: This episode is all about interpreting the growth metrics we've been seeing from company earnings over the last few weeks. Specifically, we're going to talk about how to gauge growth and momentum from reported from public reported data. future growth versus steady slow growth, the difference between growth stocks and value stocks diversification as it relates to growth and value, so we're gonna, it's gonna be a good episode, right? So sit down, put on your listening ears, and let's jump into it. So in my eyes, there are two types of growth. There's financial growth, and there's customer growth. Every three months, publicly traded companies are required to disclose their financials to the public. And usually, a company will report customer data alongside these financials. A good example of this is Disney. They report both their revenue generated from their media and technology business segment, right, Disney Plus, I'm a subscriber, you might be too. That's the financial growth, but they also share the new subscribers that they've added. Right? The customer growth, both of these are important. So how do we begin to understand this kind of growth? What is good growth? And what is bad growth? So the answer for you here, the secret sauce, the magic sauce, year over year, right? This summer did I make more than I did last summer, we're comparing summers because it's irresponsible for us to compare summers to winters, especially from a business perspective. Let's think of an example. If you're a snow cone company, and you're selling snow cones at the beach, you don't want to compare how many snow cones you sold in the wintertime to how many you sold in the summer, right? No one's buying snow cones in the winter, you want to compare apples to apples, that's the year-over-year comparison that we want to be focused on when looking at growth. So publicly traded companies do it the exact same way. They report revenue for this most recent quarter, and they compare it to the revenue they did during the same quarter last year. So let's say a company just reported their earnings results for the quarter. The first thing I'm looking at is the growth in their financials. So specifically, I want to look at this, I want to see the year-over-year growth and the line items on their income statement. I want to look at revenue, operating income, and net profit, I want to see all of these line items moving up and to the right, because if they're not growing their revenue, year over year, they're not growing their operating income near year over year or net profits, there might be a larger underlying problem here. The next thing I'm trying to decipher is where is this growth coming from? or the lack thereof? Right? Is it? Are we growing? And if we're not, but where's it all coming from? Is it coming from net new customers? Or is the company perhaps raising their prices on existing customers? Maybe it's a new product offering or a feature, what is catalyzing the growth that we are analyzing right now, by looking at this, that's going to help us better understand the company's product or service sales cycles if they're speeding up or slowing down, especially during the current macroeconomic climate. So now we understand how growth is defined. We know what line items to look for on the income statement to look for this growth rate, revenue, operating income, and net profit, as well as the different ways to think about growth customers and financials. But now I really want to better understand the speed of growth, right, as well as how the speed of growth might impact the company's valuation and how you might be going about valuing them. So you've all heard of super-fast growth tech companies, I'm sure the ones that are doubling their revenue year over year, they're unprofitable, but they're growing very quickly. Generally speaking, these are defined as growth stocks, right? We might have heard that term on public here or in the headlines, but maybe your friend told you but growth stocks, right, these fast-growing unprofitable companies. However, on the other side of the aisle, we've also heard of the old, tired but very profitable companies who aren't growing, you know, more than call it and mid-single digits every year, but they're doing just fine. And assuming it's undervalued, you can think of those companies as value stocks. So on one side, we get the super fast growing companies, the growth stocks. On the other side, we have the value stocks now. Now you're probably saying which one should I invest in? Well, I can't tell you that but what I can tell you is how you can begin thinking about them. So on one side you have capital appreciation, right? The stock price going up that might come

Austin Hankwitz: With investing in a growth stock, and then on the other side of the aisle, you have this more stable cash-flowing business that might even pay you a dividend, right? So you get a bit of cash flow and some potential capital appreciation as well. But which one is right for you? So only, you know the edge of that question. Everyone's investing style is unique to them. But if you're thinking it's a growth company, that's great. Let's talk about a few things to help you evaluate which one you might want to look at. So always want to start with the financials, right? It's usually common and maybe even required for a growth company to be growing revenue by about 30%, year over year. If they're not doing that, maybe that's a red flag.

Austin Hankwitz: The next thing I want you to look at is their operating income and their profits, right? Are their margins expanding as well, these are all things to consider when you're looking at a company. Don't forget about those customers, though we have growth companies, they tend to be software companies like to report a specific line item called the dollar-based net retention rates, you might not see this on any financial statements, but it'll likely be brought up in an earnings call or some sort of shareholder letter. Again, that's the dollar-based net retention rates, this usually means that they're able to keep and upsell the customers every year on new products. This number is normally above 100%. But every company is different. These companies also like to report the number of customers that have purchased big contracts for them. So we definitely want to be seeing that number go up, right? The big, big spending customers thumbs up there. But what about the value stocks now, right, we talked about growth, let's talk about evaluating these value stocks. So same deal, you want to think about financials and you want to think about customers, financials, aka revenue, it's probably growing mid-single digits, they're likely cash flowing a bunch of money, right, because they're old and they pay ran for a while they're likely profitable at this point. So free cash flow is likely increasing. And as free cash flow increases, there may be paying down debt, they might be reinvesting that back into the business through capital expenditures, they might be buying back shares, or even paying you a dividend. If a company is paying a dividend, something I want you to look for is growth, right? The continual growth over a long period of time of that dividend. For example, there are companies on the stock market who have been paying and growing their dividend every single year for the last 50 years. They're actually dubbed the dividend kings. And they're really interesting to learn about if you're into that sort of thing. Now, from a customer's perspective, for the value companies, it's probably a similar story, right? Mid-single-digit growth with nothing too crazy happening behind the scenes.

Austin Hankwitz: Alright, so now you're probably saying to yourself, I've got growth stocks, I understand, you know, the capital appreciation that goes with them. They're unprofitable, they won't be paying a dividend. We got the value stocks, I understand those as well. But which one is right for me? Which one should I be thinking about? So in my opinion, that all comes down to risk tolerance. Again, I cannot tell you what to do. Neither am I telling you what to do. But this is what I do personally. So I think about my core companies, and I think about my satellite companies. So let's start with the core. My core companies are those value stocks, right? They've been around for decades, they're incredibly profitable, spitting out cash dividends, every quarter, all the boring stuff that you're not going to see in the headlines. But I like that, you know, that makes up a good 60-65% chunk of my investment portfolio. I like to have a good solid chunk in these tried and true companies. So on the other side of that aisle now is the satellite companies, right? Think of this as like little satellites that are orbiting the Earth, right? The earth is all the core companies and these little satellites are the growth stocks. I have exposure to them, especially the ones I'm most intimately familiar with and, you know, keep up with but I'm not betting the farm on them by any stretch of the imagination, they're not profitable, and they still have a lot to prove, etc, etc. So I don't want to be too crazy here. So as you think about diversifying your portfolio, keep that in mind. Think about your risk tolerance, think about your goal as an investor as well as how it all comes together to help you reach financial freedom.

Austin Hankwitz: For all of those of you that stick around this entire time. Thank you so much. It means the world to me, I love nerding out on all this stuff. I love teaching it, I love talking about it. If you also enjoy learning about these, consider clicking the link in my bio and checking out my newsletter. It's completely free to subscribe. And I want you to come back to our next episode in April because I'm going to be talking about macroeconomic indicators and events. Something we probably need to be more familiar with given all of the recession talk that's been happening lately. So I will see you in our next episode. Enjoy the rest of your Friday and thanks again for learning about growth stocks with me.