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A Tale of Two Growth Stocks

Adam Levine-Weinberg
October 9, 2013

I'm going to tell you a story about two growth stocks. One is much-loved by Wall Street, while the other is very much out of favor.

This disparity can be easily seen in their vastly different earnings multiples. The highflier currently trades for more than 200 times the average 2013 analyst earnings estimate and 90 times the average 2014 earnings estimate. By contrast, the unloved stock trades for just nine times the average 2013 earnings estimate and a paltry six-and-a-half times the average 2014 estimate.

While Wall Street is clearly playing favorites, these two companies are a lot more alike than might appear at first glance. They both have significant long-term growth opportunities but also face similar challenges. With so many similarities between the two -- except their valuations -- it should be easy for you to guess that I'm betting on the cheap one.

Peas in a pod
Both companies have posted very strong revenue growth recently. The highflier has grown revenue from $2.16 billion in 2010 to nearly $4 billion over the last 12 months, an 82% rise in just two-and-a-half years. The less-loved company has been just off that pace, growing revenue from $1.31 billion to $2.07 billion over the same time period for a 58% gain.

Looking forward, both companies are expected to continue growing at double-digit rates, although the highflier will maintain an edge. In 2014, analysts expect 17% revenue growth for the Wall Street darling, compared to 11% growth for the other company. Still, both companies' management teams see huge addressable markets that should provide for many years of continued growth.

However, growth has come at a price for the companies. Each has seen severe margin contraction as investments for growth have caused costs to rise faster than revenue. In fact, barring a miracle, both companies will earn significantly less money in 2013 than they did in 2010.

Furthermore, in each case, these same growth investments have caused a big run-up in long-term liabilities. The unloved company's debt has nearly quadrupled since the end of 2010, while the highflier has seen long-term liabilities more than quintuple over the same time period Both companies also have significant off-balance sheet liabilities.

Which companies are these?
Hopefully, by now you'll agree that while there are some differences between these companies, their fortunes have been quite similar. Hopefully, you're also wondering which two companies I'm talking about!

The high-flying stock I referenced is Netflix (NASDAQ: NFLX), while its unloved companion is Hawaiian Holdings (NASDAQ: HA). The two are in completely different businesses -- one offers DVD and streaming video subscriptions, while the other is an airline -- but they have eerie similarities. Both businesses require heavy up-front capi