Acceleration

Acceleration, in the world of investing, is the secret sauce that can turn a good company into a great stock. Think of it like a sports car. A car moving at a steady 60 mph is impressive, but a car that goes from 0 to 60 mph in a few seconds is thrilling. That speeding up is acceleration. For a business, it’s not just about growing; it’s about the rate of growth itself getting faster. If a company’s sales grew by 10% last year and 15% this year, it’s accelerating. This concept is a powerful indicator for investors because it often signals that something very positive is happening under the hood. It could mean a company’s products are hitting a sweet spot in the market, its competitive advantage is widening, or its business model is finally achieving scale. Spotting this change in velocity before the rest of the market can lead to spectacular returns, as accelerating growth often lights a fire under a company's stock price.

Acceleration isn't just a fancy metric; it's a fundamental driver of investment returns. It signals a dynamic shift in a company's trajectory and can have a profound impact on its perceived value.

We all know the magic of compounding, where your investment gains start earning gains of their own. Acceleration acts like a supercharger for this effect. A company growing steadily at 15% per year is a wonderful wealth-building machine. But a company whose growth accelerates from 10% to 15% to 20% over three years is in a different league. The faster growth rate is applied to an ever-larger base of revenue or earnings, creating an exponential upward curve that can leave steady growers in the dust.

For a value investor, a company's economic moat—its sustainable competitive advantage—is paramount. Acceleration is often the clearest evidence that a company's moat is not just holding steady but actively widening. What could cause this?

• Network Effects: A social media or marketplace platform might reach a tipping point where each new user makes the service dramatically more valuable for all other users, causing growth to explode.
• Brand Power: A company's brand might become so dominant that it becomes the default choice for consumers, accelerating sales.
• Scale Economies: As a business grows, its costs per unit may fall, allowing it to lower prices or increase marketing spend, which in turn fuels even faster growth.

The stock market loves a good story, and there's no better story than accelerating growth. When the market spots this trend, it often leads to a “re-rating.” This means investors become willing to pay a higher valuation multiple, like a higher price-to-earnings ratio (P/E ratio), for the stock. This double-whammy effect—higher earnings multiplied by a higher multiple—can cause a stock's price to surge.

Finding acceleration requires you to look beyond a single data point and analyze the trend over time. It's about comparing the rate of change from one period to the next.

Don't just look at the annual earnings report. Dig into the quarterly data. The key is to compare the growth rates themselves.

• Year-over-Year (YoY) Growth: This compares a quarter to the same quarter in the previous year (e.g., Q2 2024 vs. Q2 2023). It smooths out seasonality.
• Quarter-over-Quarter (QoQ) Growth: This compares a quarter to the immediately preceding one (e.g., Q2 2024 vs. Q1 2024). It can be more volatile but gives a more immediate sense of the business's momentum.

To spot acceleration, you’d look for the YoY growth rate to increase over several consecutive quarters. For example:

1. Q1 YoY Growth: 8%
2. Q2 YoY Growth: 12%
3. Q3 YoY Growth: 17%

This pattern is a clear signal of acceleration.

Acceleration can appear in various parts of a company’s financial statements. Look for it in:

• Revenue: Is top-line growth speeding up? This is often the first and most important sign.
• Earnings Per Share (EPS): Is the company becoming more profitable at a faster rate?
• Free Cash Flow (FCF): The ultimate measure of a company's financial health. Accelerating FCF is a fantastic sign.
• Customer/User Growth: For businesses like SaaS or social media, an accelerating user base is a critical leading indicator.

While acceleration is exciting, a true value investor approaches it with a healthy dose of skepticism and a firm focus on price.

Acceleration is a core component of the Growth at a Reasonable Price (GARP) strategy. The goal is not just to find growth but to find it before it's fully recognized and priced in by the wider market. A company showing the early signs of acceleration but still trading at a modest valuation can be a goldmine. You get the powerful tailwind of growth without paying a nosebleed price for it.

Chasing high-flying stocks solely because their growth is accelerating can be dangerous. Always ask these critical questions:

• Is it Sustainable? Was the acceleration due to a temporary factor, like a single large contract or a short-lived fad? True long-term value comes from sustainable, moat-driven acceleration.
• What is the Price? By the time acceleration is obvious to everyone, the stock may be trading at a stratospheric valuation. At such levels, there is no margin of safety. The slightest hint of deceleration can cause the stock to plummet as its high valuation multiple collapses.
• What about Deceleration? The opposite is also true. A company whose growth slows from 20% to 15% to 10% is decelerating. This can be a major red flag and often leads to a painful “de-rating” of the stock, even if the company is still growing.