As a long-term investor, business fundamentals matter more to me than the near-term fluctuations in stock price. That’s because if a company can grow its free cash flow per share every year, the share price will likely follow suit over the long term.
But this does not mean that a company which has a bad year will be a bad investment.
The truth is that businesses don’t grow in straight lines. Even the fastest growing companies have periods of time when growth decelerated or even turned negative. Business growth depends on a host of factors, some of which are not within the control of companies.
Let’s take Apple for example. Today, Apple is the largest listed company in the world but its business experienced ups and downs along the way.
The table below shows Apple’s revenue and revenue growth from 2007 to 2021
From 2008 to 2021, Apple managed to grow its revenue almost tenfold. But from the right-most column, we can see that the growth rates were very inconsistent. Apple even saw its revenue contract year-on-year in 2016 and 2019. Those declines in revenue did not make Apple a bad company overnight. The iPhone maker managed to bounce back to post much stronger results each time.
As shown, even one of the most innovative companies in the world can experience inconsistent business growth.
Ultimately, a company that has a capable and innovative management team, great products, and a great value proposition to customers will be able to accelerate growth in the future.
This year, in the current challenging economic environment, many companies that previously had stellar records of growth are either growing more slowly or are experiencing contractions in revenue.
Although this is unpleasant to witness, I think shareholders should focus on what’s causing the deceleration in growth and whether the company can post a rebound. A bad year does not make a trend.
It is in times like this that we need to remember what being a long-term shareholder truly is. Your portfolio companies will not always grow at the same rate each year. There will be some good years and some challenging years.
So be patient. Focus on the metrics that matter and the quality of the business. Don’t be too quick to write off a company and don’t get too caught up with Wall Street’s obsession with near-term results.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Apple. Holdings are subject to change at any time