Dose of reality for growth stocks

Thankfully, investors are no longer prepared to pay absurd prices for companies that are yet to prove their profitability

- STEVE JOHNSON

It was a decidedly downbeat mood at this year's Roth Capital Partners conference in California in March. With the sun shining and with meetings scheduled in person for the first time in three years, you might have expected smiles and laughter.

But for most CEOs in attendance, a bit of sunshine and socialising did little to offset the declines in their companies' share prices over the past year. After all, it's been a brutal year for many of Roth's clients - typically smaller, rapidly growing companies for whom it's not uncommon to be down 70% or more from their 52-week highs.

When a colleague asked one business's CEO what he thought about an acquisition that his company made this time last year, he responded: “I paid $200 million for it and the market cap of my entire company is now less than that. How do you think I'm feeling?"

We tried to cheer a few of them up. They might be worth hundreds of millions of dollars less than they thought they were, but at least now we are more interested in their businesses. The 2021 conference, in comparison, was three long and dreary nights for the Forager team, sitting in one Zoom meeting after another talking to interesting companies with absurdly high share prices.

It's not just lower share prices in 2022 that have us feeling more enthusiastic, though. Most CEOs aren't just aware of their share prices - they use them as cues to make decisions. But the current environment is bringing a much-needed dose of reality back into that process.

Less destructive acquisitions