Cisco

Railroad ties: why infrastructure growth stocks collapse once the build-out ends

Druckenmiller compares 1999 internet infrastructure stocks (Sun Micro, Cisco) to companies selling railroad ties 150 years ago. While the railroad is being built, sales grow 50-70% a year; once it's built, growth doesn't just slow, it reverses, because no more ties are needed.

“But think of the internet infrastructure, like the railroads 150 years ago, and think of the tech stocks as a company selling railroad ties, building the guts of the internet. So once the railroad is built, while you're building the railroad, your sales are going up 50, 60, 70% a year. But once the railroad is built, your growth not only doesn't go up 70%, it goes down because on a rate of change basis, you don't need any more railroad ties.”

Steal thisBefore paying up for an infrastructure boom stock, ask what happens to its growth rate once the build-out is finished.