“Escape Velocity”: lowest velocity which a body must have in order to escape the gravitational attraction of a particular planet or other object.

Does the concept of “Escape Velocity” exist for companies?

The book “Crossing the Chasm” by Geoffrey A. Moore talks about high growth companies that have crossed into mainstream to become rock-solid enterprises. Costco ($COST) comes to mind as a modern day retail giant that continues to grow its largely bricks-and-mortar business in the face of competition from online shopping. I am a fan of Costco and count myself as one of the 123mn cardholders. Most of us renew our membership religiously every year, drawn to its low-priced (but curated) merchandise and motivated by the thrills of discovering new, unexpected bargains while shopping.

The stock, however, is no bargain. Despite slower revenue growth in the single digits and thin margins (albeit intentionally), Costco trades almost 20x forward EV/2023e EBITDA with a dividend yield of less than 1%. There are valid justifications for its valuation, and they are predicated on Costco’s almost intransigent place in the world of consumer retail. The company, currently the 6th largest global retailer in the world, grosses more than $200bn per year. It has a footprint of over 800 warehouses and counts 68mn households as members. Despite competition from online shopping, Costco has held its own and continues to grow its largely bricks-and-mortar business. In other words, Costco has more than crossed the chasm, and accordingly, its stock commands a high price. There is safety in numbers and a price to pay for that safety.

On the other end of the retail spectrum, emerging names are risky investments that may or may not work out. Take Allbirds ($BIRD) as an example: the company was recently in the news for reporting underwhelming financial results and guiding for first quarter 2023 topline to fall by 20% to 28%. The decline in sales is unexpected for a company so early on its expansion track, and a stark contrast to its high-flying days when revenue grew by 30% per annum (on average) between 2018 and 2021. For fiscal year 2022, Allbirds earned almost $300mn in revenue, but it is already looking like a late-stage Jenga. Survival odds are deemed to be low, as reflected in its current market valuation of less than $200mn.

Is there a revenue threshold that connotes “Escape Velocity”? That is, a company being large enough to free itself of existential crisis and cruise into the stratosphere? Click on the link below to read on, including a discussion of emerging SaaS player Snowflake ($SNOW) and technology stalwarts like Microsoft ($MSFT) and Salesforce ($CRM).

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