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Under Armour Teaches Hyper-Growth Stock Investors a Lesson

- By Sangara Narayanan

Under Armour's (UA)(UAA) recent correction is the best lesson every hyper-growth stock investor could learn from. By the time Under Armour reported its third-quarter 2016 results, the company had notched up 26 consecutive quarters of over-20% revenue growth. I am not sure how many companies in the past have done that before. It was a remarkable story of growth, and one that investors rewarded handsomely with sky-high price valuation multiples.


Source: Ycharts

The collapse in the last 12 months has been spectacular. After staying above 4.5 in March 2016, the price-sales ratio is now moving around the 1.6 level. The simple reason for this is Under Armour reported quarterly revenue growth of 12%, while forecasting 11% to 12% growth in 2017, unlike the above-20% growth rate we have come to expect.

But the question is, does the price correction warrant the stock losing 60% of its market value? The problem is Under Armour was overvalued to begin with, and now the market has overcorrected. That is how things work when you have a hyper-growth stock.

There are plenty of stocks trading with high valuation multiples: NVIDIA (NVDA), Salesforce (CRM), Netflix (NFLX) and Facebook (FB), to name a few. Granted, they are are all great companies with great management, which is why they were able to grow quickly. But the problem is the market assigns them such high valuations that lead you to believe that growth is going to continue forever.

But once reality dawns on us that companies move in phases and growth rates have to come down meaningfully over time, or when the company hits a bad patch, the inevitable correction comes. In certain cases, like Under Armour or Alibaba (BABA), that correction can be brutal. Alibaba took more than two and half years to cross its IPO price since going public, and no one knows if it will stay above that level for good.

The best thing an investor can do is to stay away from hyper-growth companies or invest in small amounts over a long time horizon so dollar cost averaging (DCA) works in their favor; and, if possible, minimize their portfolio's exposure to hyper-growth stocks. If you truly believe in the company, there is no such thing as missing the boat, there will always be a time to buy into the company.

Two years ago, so many people would have told you that you missed the boat with Under Armour and how you will never be able to get it for a cheap price, but here we are now: a top sports apparel and footwear brand trading at 1.7 times sales.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.