Being a rapidly growing company with a share price to match is a high wire act.

Even a small stumble or misstep can be disastrous.

It's something the shareholders of Domino's Pizza have learned over the past few months and over the past week in particular.

For a long time Domino's could do no wrong. Where other pizza companies went broke or fell by the wayside, Domino's appeared to have cracked the formula for making healthy profits out of cheap pizza and growing rapidly every year in Australia and around the world.

Advertisement

For the past few years it has been touting itself as a technology company as much as it is a company that sells disks of dough with cheesy tomato toppings. Its investments in tracking and delivery software allow it to deliver pizza to customers' doors within 15 minutes of the order being placed.

But the company has stumbled recently and last week it was punished by investors when it announced its annual earnings and missed its profit targets.

There is a lot of future growth built into the share prices of companies like Domino's. That's why at one point it was trading on a multiple of price-to-earnings multiple of nearly 90. This means that the price of the shares was equal to 90 times the company's operating earnings, compared with multiples in the tens and sometimes 20s for the rest of the market.

But it means that when investors get even the slightest hint that the growth may not eventuate, that growth premium in the share price disappears.

This is where Domino's finds itself.

Already the share price had fallen in 2017, thanks to concerns about its franchise network. This week the shares plunged 20 per cent after the company failed to meet its profit targets.

Underlying net profit in 2017 rose 29 per cent to A$118.5 million ($128,45m), but short of guidance of 32.5 per cent profit growth. Net profit is expected to rise 20 per cent in 2018, half the average rate of growth over the past two years.

At face value the results are still impressive and would be the envy of many other companies, but they didn't measure up to investors' expectations.

Advertisement

This year's steep share price fall isn't bad news for everyone.

Short sellers have done very well.

Short sellers are investors (speculators really) who profit when share prices fall by selling shares they don't own.

It works like this. The short sellers borrow some shares, say in Acme Corporation, then sell them, say at A$10 each. Then if the share price falls, they buy the shares back, say at A$8 each and return the shares to their owners, pocketing the A$2 profit.

However, if the share price rises, the shorters have to buy the shares for more than they paid and lose money.

Those who have shorted Domino's stocks have done very well over the past few months. The shares have fallen by half this year.

But it's been a long wait for the shorters, who have watched Domino's shares climb from A$2.20 each on listing in 2005 to almost A$80 in the middle of last year, all the while thinking the spectacular run of profit growth and rising share price cannot continue.

Over that period many investors have done very well out of the stock, even taking account the recent falls.

Chief among them is chairman Jack Cowin, who received A$400,000 worth of shares when he sold a small chain of pizza stores to Domino's in 1986. At Domino's peak last year, his stake was worth A$1.85 billion and is still worth close to a billion dollars.

While Domino's multiple has fallen from nearly 90, it still sits at nearly 30, around double its competitors. This means that at the moment, investors are still expecting fairly solid growth from the company, but it also means the share price is very vulnerable to further falls.

Domino's is in a crowded market. A few years ago pizza was one of the only options for fast, home delivered food and Domino's did it better than anyone else. But with advances in routing and logistics software and Uber Eats (think Uber but with food instead of people) it is a much more competitive landscape.

One thing investors can take comfort from is the attitude of chief executive Don Meij, who has been responsible for steering the company's spectacular growth since 2002.

He told reporters he was "embarrassed" to have got this wrong and has voluntarily given up his short-term bonus worth A$800,000.

"We set high standards and did not meet those standards," he said. "I acknowledge our results, while strong, did not reach the guidance we set."

At least this suggests Meij will be looking for ways to keep the company growing rather than casting around for something to blame.