Fueled by innovation and asset-light operations
Some companies are able to achieve triple-digit revenue growth because they have identified a market need and have developed a product or service that effectively addresses that need. Triple-digit growth rates are generally seen in early-stage startups or companies in emerging markets where there is a significant untapped market opportunity. And the rapidly scaling of operations usually stems from innovative products or services and asset-light business models. However, triple digit growth is often achieved by prioritizing growth through aggressive marketing and development of new products or services, which affects profitability.
Not always as good as it seems
Triple-digit growth often comes at a significant cost. Companies often need to invest heavily in marketing and advertising to achieve this, and may also need to hire additional staff to manage the increased demand. It has also become increasingly more common to attract talent through stock based compensation in order to grow at high rates, which dilutes existing shareholders. Thus, many fast-growing companies often sacrifice short-term profits to fund growth initiatives, which entail both positives and negatives.
The capital allocation tradeoff
Growing revenue and market share is good for every company. However, it might not always lead to increased shareholder value if the profitability does not get any attention and if existing shareholders get diluted to a greater extent than the gained value from increased sales. Also, it is often easier said than done to execute layoffs and to slim an organization if the growth were to diminish. In such cases, companies face the risk of being stuck with a too high cost base which in many cases could be devastating.
Two examples of triple-digit growers are Zoom and Pelaton. The video conferencing platform Zoom saw explosive growth during the COVID-19 pandemic as businesses and individuals shifted to remote work and virtual meetings. As a result, Zoom's revenue grew by 355% in fiscal year 2021. The home fitness company Peloton also experienced strong growth during the pandemic as consumers looked for ways to exercise at home. Peloton's revenue grew by 100% in fiscal year 2020. It is often extraordinary paradigm shifts like this that make it possible for large companies such as Zoom and Peloton to grow at triple-digit rates.
In summary, companies that achieve triple-digit growth often do so by identifying a market need or through being pioneers in significant paradigm shifts. However, this growth can come at significant costs in terms of increased marketing, hiring, and stock based compensation. The task for companies’ management teams is always to weigh these opportunities and challenges effectively to maximize shareholder value over the long run.