Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== 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. ===== Why Acceleration Matters to Investors ===== 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. ==== The Supercharger for Compounding ==== 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. ==== A Clue to a Widening Moat ==== 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 Market's Reaction ==== 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. ===== How to Spot Acceleration ===== 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. ==== Looking Beyond the Headline Numbers ==== 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: - Q1 YoY Growth: 8% - Q2 YoY Growth: 12% - Q3 YoY Growth: 17% This pattern is a clear signal of acceleration. ==== Key Metrics to Watch ==== 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. ===== The Value Investor's Perspective ===== While acceleration is exciting, a true value investor approaches it with a healthy dose of skepticism and a firm focus on price. ==== Growth at a Reasonable Price (GARP) ==== 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. ==== The Pitfalls of Chasing Acceleration ==== 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.