How to Tell When a Business Is Going 'Exponential'

Zoom Video Communications (ZM) soared 817%... PayPal (PYPL) climbed 907%... Costco Wholesale (COST) skyrocketed 1,416%...

And it doesn't end there.

These are just a few of the extraordinary returns called out by Canadian serial entrepreneur Salim Ismail.

Ismail is best known for his theory of exponential organizations (or "ExOs," as he calls them). These companies focus on specific tools, processes, and ideas that will help them grow profits and valuations exponentially.

The results are astounding.

Companies that score high marks on Ismail's 10-point ExO checklist tend to record impressive performances... far beyond traditional businesses or companies that scored poorly. The top 10 "most exponential" companies on his list boast 40 times higher returns than the bottom 10.

The great thing about ExO companies is that they're easy to identify. You don't need to be a Wall Street professional... or have an advanced degree... or spend hours poring over countless complicated filings.

In other words, as I'll explain today, regular investors can lock in unprecedented gains from companies going through ExO accelerations. You just have to know what to watch for.

There are a few ways to identify a company that's attempting to go exponential...

And one of the biggest is something regular readers will recognize... listening to management.

According to Ismail, there are eight big technological waves occurring right now – artificial intelligence ("AI"), robotics, nanotechnology, biotechnology, medicine, energy, neuroscience, and computing.

These disruptive trends are changing the face of many industries. They're creating new innovations and opportunities for both companies and investors.

So if a management team is talking a lot about these items on the ExO checklist, it could be a hint that major positive changes are coming.

Now, it's very easy for management to say it's working on some new trendy technology. Pretty words alone don't mean a big change is actually happening. It's often just lip service.

After all, how can an investor possibly tell if management is serious about its move into AI and robotics?

That brings me to another key metric. It tells us whether a business is truly embracing the changes that can lead to exponential returns...

The smartest companies don't just rely on employees to build their businesses...

They seek to maximize their workforces with non-traditional workers.

Ismail and I both spoke at a conference in Austin, Texas last month, and I was fortunate enough to catch his presentation. He discussed an interesting phenomenon at the companies that embrace the latest technologies long before their competitors.

In his own words...

Staff on Demand: Leverage external workers rather than "owning" employees in order to increase speed, functionality, and flexibility while decreasing fixed costs.

By that, Ismail means companies that want to go exponential will find ways to pull a much wider universe of people and expertise. That's one of the best ways to accelerate growth.

Old line managers of dinosaur firms only see employees as their available workforce. They don't consider contractors, personnel vendors, interns, and other non-W-2 personnel as part of their true workforce assets.

They don't think those people will help a business grow in the long term. That's a mistake.

There's a growing pool of talent that doesn't fit with the traditional one-employer-only concept. More than 64 million Americans have chosen to join the "gig economy"... assisting on project-based work and eschewing the traditional employer-employee model.

These contractors also happen to be many of the top experts in fields like computing, energy trends, and technology. And they're a huge benefit to the workplaces that embrace them.

This isn't just a theory. Research that we conducted with MBO Partners – a leader in supporting independent contractors – backs it up.

We found that the average aggregate Uniform ROA of companies with larger contract workforces was 11% higher than those with smaller contract workforces.

These simple factors should be on every investor's checklist...

Sadly, many folks overlook them in favor of more traditional metrics. The mainstream financial media's antiquated approach only spurs them on.

You don't have to fall into that trap, though. Look for signs that a company is taking advantage of opportunities in growing industries... and using independent contractors as a force multiplier.

These companies might be going through the same kind of ExO transformations that could have led to outsized gains in Zoom, PayPal, and Costco.

When looking for the next great place to put your money, keep an eye out for Ismail's megatrends. I know I will be.

Wishing you love, joy, and peace,

Joel
April 14, 2023