Understanding Revenue and Sales Growth

Revenue growth is the lifeblood of any company. Without growing sales, long-term profit growth becomes extremely difficult. Understanding revenue trends and quality is fundamental to stock analysis. [DEFINITION] Revenue (Sales): The total income generated from normal business operations, representing the "top line" of the income statement. ### Why Revenue Growth Matters [KEY] A company can cut costs to boost profits temporarily, but sustainable profit growth requires revenue growth. It's nearly impossible to consistently grow earnings without growing sales. **Revenue growth enables:** - Economies of scale (costs spread over more units) - Reinvestment in growth - Market share expansion - Competitive positioning ### Types of Revenue Growth **1. Organic Growth** Growth from existing operations—selling more products or raising prices. [EXAMPLE] Starbucks opens new stores and existing stores sell more coffee. This is organic growth, the most valuable kind. **2. Acquired Growth** Growth from buying other companies. [TIP] Acquired revenue is less impressive than organic—it was purchased, not built. Look for organic growth rates specifically. **3. Price vs. Volume Growth** - Price increases: Selling same quantity at higher prices - Volume increases: Selling more units [EXAMPLE] A company's revenue grew 10%: - 3% from price increases - 7% from volume growth This is healthy—volume growth shows real demand, price growth shows pricing power. ### Revenue Quality Assessment Not all revenue is equal. Consider: **Recurring vs. One-Time** | Revenue Type | Quality | |--------------|---------| | Subscription (SaaS) | Highest | | Service contracts | High | | Product sales (loyal customers) | Medium | | One-time projects | Lower | | Asset sales | Lowest | [EXAMPLE] Adobe switched from selling software boxes (~$400 one-time) to subscriptions (~$50/month). This made revenue more predictable and actually increased long-term customer value. **Customer Concentration** [WARNING] If one customer represents 20%+ of revenue, losing them would be devastating. Look for diversified customer bases. **Geographic Concentration** Revenue from multiple regions is more stable than dependence on one country. ### Revenue Growth Analysis Calculate growth rates: [FORMULA] Revenue Growth Rate = (Current Revenue - Prior Revenue) ÷ Prior Revenue × 100 **Year-over-Year (YoY):** Compare to same quarter last year (removes seasonality) **Quarter-over-Quarter (QoQ):** Compare to previous quarter (shows momentum) **Compound Annual Growth Rate (CAGR):** Smoothed multi-year growth rate [EXAMPLE] Company revenue by year: - 2021: $100M - 2022: $120M (20% growth) - 2023: $132M (10% growth) - 2024: $158M (20% growth) CAGR = ($158M/$100M)^(1/3) - 1 = 16.5% annually over 3 years ### Evaluating Growth Sustainability Questions to ask: - Is the market growing? (Rising tide lifts all boats) - Is market share increasing? (Taking from competitors) - Are new products launching? (Future growth engines) - Is pricing power maintained? (Can raise prices) - Is customer retention high? (Keep what you win) [KEY] The best scenario is a growing market AND gaining market share. The worst is a shrinking market AND losing share. ### Warning Signs in Revenue [WARNING] Red flags to watch: - Slowing growth rates over multiple quarters - Growth only from acquisitions - Heavy reliance on one product or customer - Revenue recognized aggressively (upfront vs. over time) - Channel stuffing (shipping excess inventory to distributors) [EXAMPLE] A software company reports 25% revenue growth, but: - 15% came from an acquisition - Core business grew only 10% - Customer retention dropped from 95% to 88% The headline looks good, but underlying trends are concerning. [EXERCISE] A company had revenue of $500M last year and $600M this year. They acquired a $50M revenue company. What's the organic growth rate? |ANSWER| Organic growth = ($600M - $50M acquisition - $500M) ÷ $500M = $50M ÷ $500M = 10%. The reported growth was 20%, but only half was organic. [SCENARIO] You're analyzing two tech companies: | Metric | Company A | Company B | |--------|-----------|-----------| | Revenue Growth | 30% | 15% | | Recurring Revenue | 40% | 85% | | Net Retention | 95% | 125% | | Customer Concentration | 30% top customer | No customer >5% | Company B is actually stronger despite slower growth. Its recurring, diversified revenue with high retention is more valuable than Company A's faster but less stable growth. Quality over speed.