The Path to Compounding Is Not Without Obstacles

Buying & holding through the noise–putting short-term price declines into long-term context

Every winner has scars, and the road to long-term success is not without obstacles. Many of us embrace this idea as an innate part of achieving greatness with the mindset that powering through more challenging times can lead to triumph and even more resilience.

The same can be said for businesses and investing. While market pundits, enthusiasts, and media outlets highlight the hot trades or the latest market movers, they often forget to remind investors that the long-term power of compounding occurs by owning stocks over longer periods and through those challenging times. The recent price declines remind us of this very salient point.

Netflix

Since its initial public offering (IPO) in May 2002 to date, Netflix has appreciated 31,209% on a cumulative basis (34% annualized), a remarkable return on investment and successful by almost any measure. The company has established itself as the leading video streaming subscription business and has become a household name in the U.S. But this success was not achieved overnight. Along the road to becoming a globally recognized brand, Netflix’s stock price had its share of speedbumps.

NFLX Stock Price

Source: FactSet. Data from 05-23-2002 to 03-31-2022. NFLX is currently held in the Polen Focus Growth and Polen Global Growth strategies as of 03-31-2022. Chart data uses log scale.

Over the past twenty years, we count at least nine instances where Netflix’s stock price declined 35% or more from its 52-week high, including its current ~45% drawdown. Even this decline, in some ways, pales in comparison to the 2011-2012 period when the stock price declined a stunning 80%.

Many may forget that this was when Netflix CEO Reed Hastings made the bold decision to pivot the business away from traditional mail-order DVDs (remember those things?) toward streaming movie content over high-speed internet connections. In retrospect, it seems like an obvious move, but ten years ago, it was a choice that was fraught with uncertainty and had some investors questioning whether the company would even survive. Today, Netflix has widened its competitive moat and further reinforced its financial position, with the greatest concern being a slowdown in subscriber growth. This does not necessarily make the current drawdown any less painful, but long-term context is important, and Netflix has arguably faced far more daunting obstacles than it does presently.

Meta Platforms

Meta Platforms’ (formerly Facebook) stock price has also endured a number of significant declines since the company IPO’d in 2012—at least five declines of at least 30% or more since the first day of trading. To date, Meta’s stock has returned nearly 500% cumulatively since its IPO (20% annualized return) despite these various drawdowns.

FB Stock Price

Source: FactSet. Data from 5-19-2012 to 3-31-2022. Meta Platforms is currently held In the Polen Focus Growth and Polen Global Growth strategies as of 03-31-2022. Chart data uses log scale.

Many may forget that the company’s share price got off to an inauspicious start. Within three months of its first day of trading, Meta stock had already declined more than 50%, prompting some cynics to refer to the company as Faceberg. At the time, investors were concerned about Meta’s slowing user growth, the large number of insider shares that were likely to be sold in the coming months, and advertisers doubting the potential return on investment (ROI) of Meta’s ad targeting. Ultimately, all these fears proved to be overblown. After bottoming in early September 2012, Meta’s stock proceeded to triple in value over the next 15 months, and during this period, the stock price suffered another 30% decline.

This recount of Meta’s history may offer little comfort to current shareholders who have witnessed its stock price drop by 50% over the past few months. Still, history has demonstrated this is not necessarily out of the norm, even for dominant and financially sound companies like Meta. While the business has faced some recent challenges, Meta Platforms is undergoing a shift that could change how the world engages digitally. Through this evolution, we believe Meta’s core business is well-positioned to benefit from the secular trends in digital advertising and improved monetization of their Reels platform that could potentially drive growth in the coming years.

MercadoLibre

MercadoLibre has been one of the success stories in emerging markets over the past decade. Since its IPO in 2007, the leading Latin American e-commerce platform has had a cumulative return of 4,207% (29% annualized). But, like the other examples, MercadoLibre’s long-term returns included several painful drawdowns, at least eight declines of 35% or more by our estimation.

MELI Stock Price

Source: FactSet. Data from 8-10-2007 to 3-31-2022. MercadoLibre is currently held In the Polen International Growth strategy and Polen Global Emerging Markets Growth strategies as of 03-31-2022. Chart data uses log scale.

While MercadoLibre’s IPO got off to a better start than Meta’s, it wasn’t long before the company found itself contending with the global financial crisis in 2008, a daunting proposition for a young and relatively unproven business. MercadoLibre’s stock price sold off dramatically during 2008, at one point declining as much as 90% from its high. But dynamic, competitively advantaged businesses typically recover from these setbacks and power through challenging periods. Thus, despite MercadoLibre’s current drawdown, we remain optimistic about the long-term compounding potential of the business. In fact, we would view the recent sell-off as an opportunity for patient investors.

Countless examples show that the most successful companies in the world have faced many periods where their stock prices declined substantially, but history has shown us that great companies rebound and ultimately prosper. We believe, investing with a business owner’s mindset—buying and holding through the noise and recognizing that short-term obstacles are part of the long game—truly captures the power of compounding.


Important Disclosures
Past performance does not guarantee future results and profitable results cannot be guaranteed.

This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of April 2022 may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. This information should not be construed as a recommendation to purchase, hold or sell any particular security. Holdings are subject to change. There is no assurance that any securities discussed herein will be in the portfolio at the time you review this post or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will be profitable or will equal the investment performance of the securities discussed herein. For a complete list of Polen Capital’s past specific recommendations for the last year, please contact [email protected].

All information has been sourced from Netflix, FB and Meli company financials for the relevant period discussed.

All currency reported in USD unless otherwise stated.