Financial success starts on the top line. This metric highlights companies expanding sales much faster than their share counts.
By William Baldwin, Senior Contributor
W
hat makes a growth stock? The first thing most investors look at is the earnings per share. But there’s a case to be made for giving equal attention to revenue growth. More precisely, you want companies whose revenue per share figure is growing at an impressive exponential rate.
Winners on this score include such Wall Street favorites as Tesla, Block (the parent company of the Square payment network) and Meta Platforms (Facebook, that is). Ahead of them in the rankings are some less familiar names: Cheniere Energy, which exports liquified natural gas; Alnylam, a money-losing but very promising developer of RNA-based medicines, and MercadoLibre, a Latin American e-commerce platform whose shares see heavy trading on Nasdaq.
Some smart investors have zeroed in on the top lines of companies. One was Charles Allmon (1921 – 2015), whose long-running Growth Stock Outlook newsletter included half a dozen stocks that appreciated more than 10,000% while on the recommended list. In an interview with Forbes on the occasion of his retirement at age 87, Allmon explained his philosophy. “In the long run a company cannot grow any faster than its sales,” he said. “I look at sales first, earnings second and balance sheet third.”
Yes, earning growth matters a lot, and it’s scored in our review of earnings growers (see story list at bottom). But here we consider only revenue, not what companies get out of it.
The sorting is by growth in revenue per share, since a boost in revenue made possible by a dilution of the share base doesn’t do much good for investors. Example: International Flavors & Fragrances, which makes chemicals for food and perfume aromas, looks pretty good in total revenue, better than tripling it over the past decade. But it has tripled its share count in that period. Its revenue per share growth comes in at an unimpressive 3% a year.
Contrast that to Oracle Corporation, which sells software to maintain corporate databases. It is using its fount of profits to reduce the share count with buybacks. Thus, while Oracle’s total revenue has been growing at only a 3% rate, its revenue per share has been growing 10%.
The analysis starts with 1,614 companies in the FactSet database that trade in the U.S., have market capitalizations over $1 billion and show revenue and shares outstanding numbers for at least 10 of the 12 years 2013-2024 (the last being a forecast).
The long-term growth number is what comes out of an exponential fit to the revenue per share history. Predictability measures how closely that history tracks an exponential line (the statistician’s coefficient of determination), with a penalty for missing years. The top 10% of the group in predictability get the “Very High” label, the next 15% “High,” the next 15% “Above Average.”
Among big companies with “Above Average” or better predictability, here are 20 standouts, with revenue per share growth between 22% and 58%:
Not quite squeaking in are two names you expect to see: Amazon.com and Alphabet (i.e., Google). They both make the second ranking, however. This roster is limited to big companies with growth rates above 18% and Very High predictability:
The final list is an assortment of revenue disappointments. It includes a woebegone utility (the former Pacific Gas & Electric), a good company in a shrinking industry (Artisan Partners, active management), a telephone company that wasn’t sure about diversifying into content (AT&T) and two greater-fool speculations (GameStop and AMC Entertainment).
The revenue and share count statistics used as inputs come from FactSet, the price/earnings ratios from YCharts. Conclusions about growth rates are the author’s. The calculation uses a share count estimate for December 2024 that is an extrapolation of the recent trend in shares outstanding.