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For the first time in 4 years, profitability beats growth


Jeremy Abelson

Jeremy Abelson is the founder and lead portfolio manager of Irving Investors. Combining his experience as an operator and institutional investor, Abelson runs Irving as a multi-strategy platform making long-term durable investments in both the public and private markets.

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Jacob Sonnenberg

Jacob Sonnenberg is a portfolio manager at Irving Investors and runs Irving’s Technology and Consumer Crossover Fund. Jacob has been investing in tech for over a decade and applies a deeply analytical approach with a true passion for entrepreneurship to his investment strategy.

For the last decade, private company executives have all asked us the same question: “Do public market investors prefer profitability or growth?” While the answer to that question is not simple, the recent trends in the data are clear.
In 2021, profitability — measured by free cash flow (FCF) margins, not revenue growth — had the higher correlation to positive stock returns in the software sector. This broke a four-year trend of revenue growth being the more important driver of software company stock performance.
This correction is big. And the reversal in investor sentiment is clear.
In addition to deviating from the four-year trend, the data shows profitability correlation hit a seven-year high at the end of last year, while revenue growth correlation was close to a seven-year low. With the continued selloff, revenue growth correlation broke well below the seven-year historic low, and profitability correlation stayed at record highs, as shown below.
What’s happening?
So far in 2022, the S&P 500 and Dow J …

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