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Growth Guru Likes Facebook, Microsoft

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Facebook and Microsoft are doing what it takes to grow faster than their rivals, says a leading expert on corporate growth.

Both companies -- founded by Harvard dropouts -- are growing faster than rivals in different industries for different reasons.

But if you believe that they have a chance to grow faster than analysts expect, their shares could rise -- especially if they can beat expectations and raise guidance in future quarters.

The theory underlying their success is espoused by Northwestern University Kellogg School of Management professor Mohanbir Sawhney.

Sawhney does not believe all growth is good. Bad growth -- such as that caused by subprime lending or acquisitions that add needlessly to a company's complexity -- produces short-term revenue growth but longer-term collapse.

Good growth, says Sawhney, is organic -- from "increased share of [a customer's] wallet, stealing share from competitors, or increasing the size of the market [and maintaining your share]."

He gave examples of each. He was on the board of an insurance claims management firm that gained a bigger share of wallet by adding new services that its customers wanted -- such as policy administration, underwriting, paying claims, and terminating policies.

He cited Apple's iPhone as an example of a company that stole share from cell phone rivals by offering consumers a better value proposition.

And he sees many opportunities to expand the size of the pie in emerging markets by introducing smart phones and wireless networks, banking, and credit cards. He also sees such opportunities for the likes of Cessna in renting to executives by the hour and from McDonalds which recently began offering all-day breakfast.

Sawhney particularly admires the growth strategies of Facebook and Microsoft.

In the first quarter of 2016, Facebook reported a 52% rise in revenue to $5.2 billion and a tripling of net income to $1.5 billion -- yielding a net profit margin of 29%.

Since going public four years ago, he believes Facebook has done a phenomenal job of monetizing access to its users. Although he sees possible "growth from India (1.3 billion)and China (1.5 billion), Facebook's number of monthly users (1.35 billion) and the amount of time they spend per day (50 minutes) is saturated."

Sawhney believes that Facebook's big opportunity is in driving up the average revenue per user. "Facebook Video is a major growth vector. It is turning Facebook into a TV network that will take an increasing share of the $100 billion TV advertising market," he said.

He also believes that Facebook will find a way to monetize the instant messaging service WhatsApp that it acquired for $22 billion in 2014.

And while he is unsure about how its $2 billion purchase of virtual reality company, Oculus Rift will turn out, he does see it as evidence that Facebook believes in making fewer, bigger bets on bold, rather than incremental, innovation as he explained in his book, Fewer, Bigger, Bolder.

He also believes that Microsoft is doing a better job than rivals such as HP Enterprise and IBM when it comes to dealing with the business challenges associated with the cloud.

Recent results at Microsoft suggest it is being hurt by the near 10% decline in PC shipments. Its revenues were up slightly to $22.08 billion in the latest quarter.

That was thanks to 8% growth in its Intelligent Cloud business to $6.1 billion. Analysts expected the firm to report $6.28 billion with Azure revenue up 120%, according to CNBC.

"Satya Nadella has grown Microsoft's cloud business at 70% and he is playing the ecosystem game again. For example, Microsoft made a version of Office for the iPad -- something Steve Ballmer would never have done. He is expanding the scope of the Microsoft platform in the enterprise," explained Sawhney.

I think Sawhney may be on to something when he highlights the strategies that lead to public company growth.

If those strategies allow companies to grow faster than Wall Street expects, their shares could be a good buy.

But if I had to choose one of the two companies, I would favor Facebook -- which I think has most of its growth ahead of itself -- over Microsoft -- which is saddled by a heavy dependence on the declining market for PC software.