Q: Palantir CEO Alex Karp on Monday characterized his company’s performance using a simple rule that has historically boded well for tech stock returns.
Karp said in a release that the company’s score with the “Rule of 40” was a 94%
Rule of 40 says that the sum of the revenue growth rate and the profit margin should be 40% or higher.
Do you use this?
How can an average investor measure & use it?
Can it be used on all stocks [company's]?
Thank you.
Karp said in a release that the company’s score with the “Rule of 40” was a 94%
Rule of 40 says that the sum of the revenue growth rate and the profit margin should be 40% or higher.
Do you use this?
How can an average investor measure & use it?
Can it be used on all stocks [company's]?
Thank you.
5i Research Answer:
It could be used on any company technically but it typically applies mostly to software companies, as they tend to have higher growth and margins. The calculation is to take the year-over-year growth rate and add it to the net margin. The goal is to have it over 40 and it is a range (or higher) that is typically believed to be a sweet spot for companies. The combination of margin and growth can sum together in any way (i.e. you don't technically need a minimum growth rate for revenue for it to apply). It can be measured by looking at the revenue growth and margins which tend to be fairly readily available metrics. We do look at it as a ratio when examing companies.