Nir Kaissar at Bloomberg wrote a cool article on "Amazon and Other Tech Giants Buck the Empire Trap." Nir's article draws the difference between our investment factor and our expected growth factor. Our factor series are available at our global-q data library.
Because our expected growth factor is relatively new, I thought I could elaborate its intuition against the background of our investment factor. The investment CAPM (a reformulation of the Net Present Value rule in corporate finance) says that the discount rate equals the marginal benefit of investment divided by the marginal cost of investment. And the marginal benefit includes expected profitability and expected growth.
The investment factor is built on tangible investment, which is measured as the growth rates of book assets on the balance sheet. Tangible investment has little impact on expected growth. And the investment CAPM implies a negative relation between tangible investment and the cost of capital (captured by our investment factor).
However, the expected growth factor is (mostly) built on operating cash flow, which accounts for some of the most reliably measured intangible investment at the firm level, such as R&D. Intangible investment raises expected growth. And the investment CAPM implies a positive relation between intangible investment and the cost of capital (captured by our expected growth factor).
These economic insights are explained in depth in the latest draft of our security analysis paper.
The expected growth factor is from our 2021 RoF article. Please see Slides and the video presentation: