One of the most overrated term in corporate finance is growth while the most undervalued & ignored concept is that of the momentum.
Momentum in physics means the quantity of motion of a moving body, measured as “mass x velocity”. Important attribute of momentum is its seemingly self-propelling energy that keeps a system moving without any further external stimulus. Physicist call it the conservation of the momentum.
Momentum in context of any human endeavor results from “a pattern of decisions made over time, each decision influencing subsequent decisions” (Haseeb Qureshi says in his book quoted in one of my earlier blogs).
For an entrepreneur or an investor, it means the combination of (a) continued evolution and innovation (as opposed to the stagnation) – signifying the velocity of the business, and (b) critical presence (as opposed to being an ‘also ran’ market participant) in marketplace – signifying its mass. Achieving deep and broad market presence for its products & services is great. But, investors don’t value such an enterprise much, unless the market presence is combined with incessant pursuit of new product opportunities or process innovations.
Tracking momentum is way more important than paying obsessive attention to the growth achieved in past quarters by a corporation. In fact, there can be no consistent growth without momentum! Significance of the momentum cannot be better explained than by comparing the stock performance of Apple and Amazon (see chart). Clearly, the difference in the momentum these two companies have and its impact is stark! It is the momentum that determines how valuable a business is. Yet, B-Schools that drill profitability, liquidity, and leverage analysis in their student’s brains, do not talk of momentum. Is it because it is too abstract a concept to put a value to it? I think not. Here are some of the data-points that can be tracked to measure the momentum:
Revenue from new products/ services/ markets ÷ the total revenue: revenue from the new launches in, say, previous 2 years – historic & forecast; Year-over-Year growth/ decline in revenue-weighted market share: by product or service category/ by region; Benefit from new initiatives ÷ EBITDA: not just launches but any initiative such as product/ service promotions, process improvements, etc.
Whether you are an investor or a corporate executive, you can find your own way to track the momentum of the businesses you are involved in. But there is no denying the fact that momentum is the single most important driver of the corporate valuation!