While painful for investors in the short term, efficient management teams at high-growth companies often make the difficult choice to forsake short-term earnings power for growth and expansion in the long term. As a buy and hold type of investor, I am of the mind-set that such situations are not only misunderstood by many investors but also serve as terrific buying opportunities.
Two companies that recently announced their intentions to forsake earnings in the short term to drive growth in the long term are Netflix (NASDAQ:NFLX) and Boston Beer (NYSE:SAM). Although they are in two very different businesses, both companies have chosen to aggressively pursue emerging growth opportunities at the current time.
In the company's latest earnings release, Netflix management highlighted its strong international growth. In the first quarter, the company added 1.7 million members abroad, which brings its total international audience to 12.7 million. In the second quarter, management expects to grow net additions by 50% year over year due largely to a lack of seasonality seen in the domestic market.
Management also believes there is much more room for growth in global markets. Currently, international markets generate 25% of Netflix's total revenue, but management expects to derive more than half of future revenue from the segment. To this end, management is willing to continue operating the international segment in the red to capitalize on emerging opportunities.
The company's statement read:
However, our substantial expansion into new European markets (with corresponding investments in content and marketing) in the second half of 2014 will keep our expanded international segment at a net loss. As we've discussed in prior investor letters, we intend to continue our international expansion over the coming years, so our near term profits will be quite modest as we invest in this large global opportunity.
Small craft-beer brewer Boston Beer was faced with a high-quality problem last year; the company simply could not keep up with robust demand for its products. On the company's most recent earnings call, President and Chief Executive Officer Martin Roper explained:
Over the past year, our supply chain struggled under the unexpected increased demand, and we experienced higher operational and freight costs as we reacted.
To combat this problem, management began improving the company's packaging and shipping capabilities as well as its tank capacity. Roper said:
Given the opportunities that we see, we expect a continued high level of brand investment and capital investment as we pursue growth and innovation. We are prepared to forsake the earnings that may be lost as a result of these investments in the short term as we pursue long-term profitable growth.
Also, in order to stay at the head of the craft-beer segment, Boston Beer continues to invest in new beer brands. The company's research and development division Alchemy & Science is expected to receive an additional $5 million-$7 million in funding in fiscal 2014 to continue developing new products.
It may be uncomfortable for some investors to experience earnings volatility in the short term. But when it is done expressly with the goal of preserving and even increasing long-term growth potential, it can be a great thing.
When observing fiscal 2014 revenue growth projections for both Netflix and Boston Beer, the strategy appears to be working well. Both companies are expected to increase sales by more than 20% in the current year. What's more is that even with expected earnings volatility, Netflix and Boston Beer are still projected to grow earnings per share in 2014 at 121.6% and 24.1%, respectively.
When combined with the fact that shares of both companies have pulled back recently, long-term investors seem to have two great growth opportunities in Netflix and Boston Beer.