Bangkok: In today's fast-paced business world, companies often experience a surge in sales growth, turning executives into celebrities and investors into hopefuls. However, Dr. Nives Hemvachiravarakorn cautions that from a Value Investor (VI) perspective, rapid growth can be misleading if it is not sustainable. Businesses that exhibit quick growth but fail in the long term generally fall into two categories.
According to Thai News Agency, the first category is the "price war trap." Companies in this group adopt a strategy of undercutting competitors by selling at lower prices to boost sales through economies of scale. However, this often results in minimal profit margins or even losses. Examples include local restaurants that aggressively lower prices, and global cases like Pets.com, which collapsed due to losses from selling cheap goods, and WeWork, which expanded rapidly but suffered from excessive fixed costs.
The second category is the "fashion trend trap." These businesses thrive on temporary popularity, especially in the digital age where trends emerge and fade quickly. Products in this category have short life cycles as customers quickly lose interest. Instances include trends like the donut craze, bubble tea, and Japanese lifestyle products that lose appeal once competitors replicate them. The Labuboo case study illustrates this, as its sales soared with the art toy trend but may lack long-term protection against new competition.
Dr. Nives advises that true superstocks should meet specific criteria. Businesses should be authorized to set prices ensuring profitability, attract customers due to product quality rather than low prices, and possess unique selling points that are difficult to imitate. Genuine demand should be based on actual usage rather than fleeting trends or price incentives.
He concludes that from a value investing perspective, high-growth businesses that are high-risk should have a price-to-earnings (P/E) ratio of no more than 10 times, as they do not qualify as superior businesses in the long term. Analyzing business sustainability requires examining whether profits withstand changes and competition, rather than being swayed by short-lived trends.