On a hot summer morning in July of 1962, Sam Walton opened his first Walmart in Rogers, Arkansas. Ten years later, he listed the company on the New York Stock Exchange. Walmart went on to become one of the great growth stories in stock market history. Revenues compounded 37 percent annually over the decade of the 1980s. Walmart’s stock compounded 46 percent annually over the same period. The investment world has rarely seen such a phenomenal growth story either before or since.
Until Facebook. Mark Zuckerberg’s company, it turns out, outgrew Walmart. Not by a little, but by a lot. Facebook’s revenue compounded at 114 percent annually from 2005 to 2015 compared with Walton’s growth spurt of 37 percent annual growth.
Sam Walton increased revenues 23-fold in the 1980s, an extraordinary achievement at the time. Zuckerberg’s Facebook increased revenues nearly 2,000-fold from 2005 to 2015. Beyond unheard of.
In order to grow sales, Walton of course had to build new stores. He had to stock those stores with inventory, hire people to operate the stores, hire people to supervise the people operating the stores, and build distribution centers. He sold physical products. Yes, he had a fresh new take on selling physical products, but by selling physical products he had to invest capital. He could grow only as fast as the cash coming off his existing stores would allow him to grow. He, in short, faced a cash cycle constraint. That constraint was not something Walton could manage away; it was inherent in the type of business he operated.
Zuckerberg faced no such constraint. He sold a digital product over the internet. He had no stores. He had no inventory. He had no value chain to manage. His business required almost no capital to grow. His growth was limited only by consumers’ demand for his product, which of course was both global and astronomical.
One thing Walmart and Facebook had in common was a very strong and significant value proposition for customers. The customers for each company clamored for more and more product. A strong and dominant customer value proposition is a prerequisite for profitable long-term growth, whatever the industry.
What Walmart faced that Facebook didn’t were the constraints on growth associated with delivering a physical product through physical stores. Facebook’s digital product, delivered over the internet, removed essentially all growth barriers. Facebook achieved what amounted to instant scale.
Here is where consensus-driven equity analysts get it wrong. They subconsciously apply growth barriers where none exist. A business that has a compelling value proposition and delivers a digital product over the internet is a new breed of company, a breed that achieves global scale at astonishing speed. Growth barriers that have applied to nearly every company in history do not apply to this new breed of company. They grow at a startling rate one year and then repeat it year after year.
We believe the market systematically underestimates the growth prospects for this new breed of company. What self-respecting equity analyst would have looked at Facebook in 2005 and forecast a 2,000 fold increase in revenues over 10 years? Yet, that is exactly what Facebook did. It then turned around and grew revenues 50% annually over the subsequent 5 years.
A killer value proposition. A digital product sold over the internet. A killer combination.
