Evaluating Tech Companies

We are launching the first part of our series “Evaluating tech companies”, starting with revenue growth. In this report we developed a tool to evaluate the quality and consistency of tech companies’ growth potential. Our answer is: once investors have clarity over what is the future normalized growth pace. The goal of this report is to shed light on short,
medium and long term growth potential of tech companies. Does revenue growth trump profitability? No, but revenue growth is more urgent.

Our quantitative insights came from a pool of 50 US SaaS companies, the correlation between their historical growth, multiples and stock performance. Our qualitative insights came from studying three traditional growth drivers: price increases, market expansion and product innovation. We also discussed how each company under our coverage will tackle a combined TAM of R$300bn. We compiled all the insights of this report into a Growth Scorecard, to be used on our LatAm software coverage or as a tool to assess growth potential of any other tech company. At the end, we suggest which company(ies) can be the long term growth outperformers.

Does revenue growth trump profitability? No, but revenue growth is more urgent. Investors want growth now, as long as profitability comes at some point. Our “Evaluating tech companies” series begins focusing on revenue growth because we think it is a leading indicator for the success of a tech-oriented business model. In most cases, revenue growth will generate profitability at some point in the future (unless the company is an inefficient capital allocator, but this is another topic). In addition, consistent revenue growth usually means the company is well-managed, has a solid product and a sizeable addressable market. Of course, there are other ways to achieve increased profitability levels. Alternatives to revenue growth include lowering opex or capital allocation strategies. We will discuss such factors in the following series, because they are important as well. But consistent stock outperformance in the tech world will rely mostly on consistent revenue growth..