It would be near impossible to discuss growth investing today without, at some point, the conversation turning to artificial intelligence. Capital is flowing into data centres, semiconductors and power infrastructure at a scale that would have been difficult to imagine only a few years ago. The sums in question are increasingly measured in trillions rather than billions, while some of the world’s largest companies have seen their market values rise alongside expectations for what AI may ultimately become.
For growth investors, the attraction is naturally compelling. A vast new market is developing, companies are spending aggressively to participate and revenues across parts of the ecosystem are expanding rapidly. It would therefore be easy to conclude that this is where a growth portfolio should gravitate.
However, that conclusion is where the investment work begins, not where it ends.
Innovation opens possibilities and attracts capital. Yet investors can easily confuse two ideas: what is changing the world and what is creating value for shareholders. These can sometimes overlap. They do not have to.
A business need not invent a new industry to become more valuable. Equally, participating in an extraordinary technological advance does not settle whether an investment will earn an attractive return. The opportunity matters, but so do the cost of pursuing it, the competition it attracts and the price paid to participate.
The growth that interests us is not a sector. Rather, it is the prospect of a business becoming more valuable to its shareholders over time.
Bigger, but from What Point of View?
Consider a company whose revenue doubles. In an environment such as AI, where demand is expanding rapidly, that might sound like compelling evidence of success. But revenue growth tells us surprisingly little about what has happened to the value of the business.
Suppose earnings also double. That takes us further, but still not far enough. If the company doubled its share count to finance the expansion, aggregate earnings may be twice as large while the earnings attributable to each shareholder have barely changed.
Even earnings-per-share growth does not answer the entire question. We must also ask how much capital was required to produce it. Giving a business enough money can usually make it larger. Whether that investment makes shareholders wealthier depends on what management earns on the additional capital.
This is particularly relevant when enormous amounts of capital are chasing the same opportunity. More data centres, more computing capacity and more infrastructure may all be required to support the growth of AI. However, the fact that the spending is necessary does not tell us whether every company making that investment, or supplying it, will earn an attractive return.
Revenue is part of the picture. Earnings per share bring us closer. The returns earned on the capital committed help determine whether the progress is worthwhile. These are not qualifications added reluctantly to a growth strategy. They are what give the strategy meaning.
When Progress Looks Like a Setback
Decisions that build future value can make today’s results look less attractive. A management team may hire ahead of demand, develop a product or invest in capacity. The costs arrive before the benefits, and near-term earnings or cash flow may weaken even as the business becomes better positioned.
The scale of investment taking place around AI makes this especially visible today. A company spending aggressively to prepare for future demand may be making precisely the right decision. Another committing similar amounts may simply be responding to competitive pressure with little prospect of earning an adequate return.
Calling spending an “investment” does not settle the question.
Our task is to understand the path from the capital committed today to the value it might create tomorrow. How durable is the demand? What competitive advantage will allow the company to capture it? How much additional capital will be required? How long will the returns take to arrive? And what happens if the opportunity develops differently than expected?
Patience is valuable only when attached to a sound assessment. A longer time horizon is not permission to stop measuring progress.
Different Businesses, Same Question
Consider a company like AAR Inc., an aviation services company currently adding maintenance capacity. New hangars may be booked for years, skilled labour scarce and customers short of alternatives. It hardly resembles the conventional image of a growth industry. Nonetheless, if capacity can be added at attractive returns and demand remains durable, the business can grow meaningfully in value.
Compare that with a company sitting directly in the path of an enormous technological spending cycle. Its addressable market may be growing much faster. Its revenue opportunity may be far larger. However, the investment question remains the same: what will shareholders earn on the capital required to capture that opportunity?
That is why growth can appear in very different places.
Competitive advantage helps determine whether it can endure. Management quality influences whether the opportunity can be realized. Capital allocation determines whether pursuing it creates value for existing owners. The industry may change, but the discipline does not.
That matters at the portfolio level as well. A growth portfolio does not need to become a collection of different ways to make the same economic bet. If businesses can compound value across different industries and end markets, diversification allows a portfolio to participate in multiple sources of growth rather than depending excessively on one theme, however compelling that theme may appear.
Diversification does not replace conviction. It recognizes that even our highest-conviction conclusions are being made with imperfect information.
A Good Business Still Needs a Sensible Price
There are two capital-allocation decisions at work. Management decides how to invest in the company’s resources. We decide whether, and to what extent, to commit our clients’ capital to that company.
Price and value are not synonymous. Price is observable every day. Value depends on what the business may earn in the future, the capital required to get there and the uncertainty surrounding that outcome.
A share can look expensive relative to today’s earnings and still offer an attractive return if those earnings understate the business’s future capacity. But “long-term” cannot become an excuse for paying any price. Time, risk and the return available from the starting valuation all matter.
That judgment also helps us manage position weights. Enthusiasm may push a share price ahead of what the business can reasonably deliver. A near-term disappointment may lower the price without changing the longer-term opportunity. No opportunity exists in isolation: valuation, risk and existing portfolio exposures also matter. The share price moves first. Our job is to decide whether value moved with it.
What AI Makes Visible
None of this is an argument against AI. The opportunity may prove every bit as consequential as current expectations suggest. Nor is it an argument that less exciting industries somehow make better investments.
It is an argument against confusing growth around a company with value creation within one.
For active, bottom-up investors, identifying an attractive theme is only the first layer of the work. We then have to determine which businesses possess an advantage, which management teams can translate that advantage into durable growth, how much capital will be consumed along the way, what existing shareholders will ultimately own, and whether the prospective return justifies the price and risk.
Sometimes that work may lead directly toward one of the most exciting technological changes of our generation. Sometimes it may lead to an aircraft-maintenance hangar.
That is precisely the point.
Growth is not defined by where the most money is being spent or which industry is attracting the most attention. It is defined by the ability of a business to make each shareholder’s stake more valuable over time. And it is why we remain perpetual optimists when it comes to the ability to identify investment growth opportunities.