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Will Growth Stocks Fall Behind Value Stocks Within the Next Decade?

By Nicholas Rossolillo, Jason Hall, and Jon Quast – Oct 8, 2021 at 2:03PM

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Some analysts predict value stocks will make a comeback within the next decade, but don't underestimate the rapid pace of technological change.

Value stocks (companies that have mostly "plateaued" but generate stable profits) have largely underperformed growth stocks for over a decade now. Some investors have theorized that a shift favoring value-stock outperformance could occur in the next decade. Are growth stocks done for? In this Motley Fool Live segment from The Five recorded on Oct. 1 , Fool.com contributors Jason Hall, Jon Quast, and Nicholas Rossolillo provide insight into how they're thinking about business growth and technology trends.

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Jason Hall: "Now, finance recently cited a well-known analysts prediction. Then the next decade, growth stocks are likely to fall behind because of a paradigm shift. What is your take on such notion?" As a growth investor, I do see that my portfolio is trailing in the S&P 500 benchmark. This is on track to be the first year that the S&P 500 tech sector underperforms the S&P 500 in at least four years. I think it's only underperformed once in the past [laughs] 11 years, so that would be an interesting shift. I would love to hear what you guys think. Nick, go first here.

Nicholas Rossolillo: Can I be really arrogant and say I don't think that analyst has any idea what's happening in the business world. These tech trends are huge, they're massive. They're reaching this point where it's like technology is not just like the sole self-contained sector of the economy anymore, it is the economy. It's like reaching into every sector out there and that's not going to happen overnight.

Hall: Yeah. I think we might have just lost Nick here. Jon, you still with me?

Jon Quast: I'm here.

Hall: He is back. Nick, I think you're like the statue guy in the park that freezes up and you give them the tape and then he moves a little bit. No, I think you're right. I think the other thing too, is there's so much focus has been put on valuations. I would say, yeah, it's true the valuations are certainly high. Do you think about some of these like CrowdStrike (CRWD 0.73%) that are trading for like 30 plus 40 plus times sale sometimes? But I would also say, look at the most valuable companies in the S&P 500 and think about the operating margins that these companies have. I would say if you looked in the top 10, we've probably never had the top 10 of the S&P 500 companies that generate the level of operating margins that deserve these high evaluations. Nick, do you think that's a fair statement?

Rossolillo: Absolutely. Maybe there was a point in time where that was the case but like our data doesn't go further beyond like 1900. The last time a movement like this took place was like the industrial era in the late 1800s where there was this massive technology paradigm shift and it took decades to work it's way through the whole economy and transformed everything. Businesses got more efficient, they got more profitable. This is not going to just go away quickly. It's going to last, a really, really long time.

Hall: Jon, how are you thinking about your own investing when it comes to thinking about growth or tech stocks?

Quast: Well, I mean, what really impresses me is just the rate of innovation and it's why I'm very bullish on if you want to call them growth companies, that's fine. Valuation aside. I mean, innovation is just happening so fast. Think of the companies that have been founded in the last 10 years, founded, not went public. You have Zoom (ZM -0.28%), that's founded in the last 10 years. Our idea of a billion-dollar quarterly revenue run rate. Look at a company like Skillz (SKLZ -4.60%). I believe Skillz was founded seven years ago. They are approaching half a billion dollars in annual revenue. Snowflake (SNOW 1.16%) founded in the last 10 years.

All these companies have been founded in the past decade and yet there are multi-billion dollars of real money business going on. The rate of innovation is what impresses me and I think it's only getting faster. I think that the companies that IPO five years from now could even be better growth opportunities than the ones that are going IPO this year. It just seems like technology increases the rate of innovation and it's why it's so hard to say, they're going to underperform for a decade. That's a really long time for something that is compounding gains so quickly.

Hall: It really is. Nick made a comment in our little internal chat. This question we could do an hour on. We really, really could. It's a really compelling topic. I will say this, there is one thing that I'm doing, not because I'm concerned about growth stocks or tech stocks underperforming the market because it's something that I'm doing as the way I'd develop my own net wealth. Is I'm taking a barbell strategy where I'm investing still most of it. It is not a 50-50 barbell, I want to say that too. The majority I'm still investing in growth stocks. A lot of those are these tech companies that are leading the next industrial revolution.

Nick, you hinted at that. Then I'm taking a small amount of money that I'm investing in dividend growth stocks because I do want to have some a barbell, so that's if other parts of my portfolio don't perform as well or other things happen with the economy, I know that I have predictable revenue growth companies that are growing their dividends and that's a source of cash flow that's going to grow over time. I'm looking at taking that approach to it.

Nicholas Rossolillo and his clients own shares of CrowdStrike Holdings, Inc. and Zoom Video Communications. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Skillz Inc., Snowflake Inc., and Zoom Video Communications. The Motley Fool has a disclosure policy.

Stocks Mentioned

CrowdStrike Stock Quote
CrowdStrike
CRWD
$115.08 (0.73%) $0.84
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$72.16 (-0.28%) $0.20
Snowflake Stock Quote
Snowflake
SNOW
$144.53 (1.16%) $1.66
Skillz Stock Quote
Skillz
SKLZ
$0.85 (-4.60%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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