How to Invest in Growth Companies

Worldwide Invest Better Day 9/25/2012
Worldwide Invest Better Day 9/25/2012

The following video is part of our "Motley Fool Conversations" series, in which analyst John Reeves and advisor David Meier discuss topics across the investing world.

Analyzing growth businesses can seem like a daunting task. John and David would like to simplify it a bit in order to help Fools invest -- better. The first thing one should do is determine the total addressable market. Then, make sure it's big, or it's getting big. LinkedIn's addressable market is $27 billion. Current revenue is $724 million. Big Data analytics is expected to grow to $20 billion by 2015, which is why Splunk might be attractive. Next, we need to determine if the company is differentiated, either with a better product or a disruptive technology. InvenSense has created motion sensors with a smaller form factor, giving it an advantage in the marketplace. Fusion-io was one of the first companies to use solid-state memory to help server processors run more effectively. Finally, we must determine if the growth can persist. IPG Photonics developed the fiber laser, a disruptive technology. Not only will it grow by taking market share away from traditional lasers, but the company is investing heavily in R&D to create new markets for its products. That will help it grow for years to come. Investing in growth companies can be very lucrative for investors. These three simple steps to analyzing growth businesses should help you invest better.

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David Meier owns shares of InvenSense. John Reeves has no positions in the stocks mentioned above. The Motley Fool owns shares of Fusion-io, InvenSense, IPG Photonics, and LinkedIn. Motley Fool newsletter services recommend IPG Photonics and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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