What is Growth stock?
O'sish aksiyasi
In short
A company growing revenue fast (20%+ a year). Usually a high P/E and little or no dividend.
A growth stock is a share in a company whose revenue grows much faster than the market average, usually 20% or more a year. Investors pay not for today's profit but for the much larger profit they expect later.
Typical traits
- Revenue grows fast year after year;
- P/E and P/S are above the market average;
- Profit is reinvested in expansion rather than paid out — little or no dividend;
- Common in technology, healthcare and new consumer sectors.
Risks
A growth stock's price is very sensitive to expectations. When growth slows, two things happen at once: earnings grow less than expected and the market is willing to pay a lower multiple. The price then falls much more than earnings. Rising interest rates also reduce the present value of distant profits, so growth stocks usually suffer more. Their volatility is higher too.
How to value them
PEG, P/S and the consistency of revenue growth are useful for comparing growth stocks. Growth and value are not opposites — many investors mix both for diversification.
The growth company quadrupled revenue, so the market gives it a high P/E. The value company grows slowly but is usually cheaper and pays a dividend.
When the rate rises from 4% to 8%, near money loses only 3.7% of its value, distant money 31%. Most of a growth company's cash lies far in the future — that is why it is rate-sensitive.
Example
A fictional company: revenue $1B, growing 30% a year.
- Year 1: $1 × 1.3 = $1.3B
- Year 2: $1.3 × 1.3 = $1.69B
- Year 3: $1.69 × 1.3 ≈ $2.2B
Today EPS is $2 and P/E is 60 → price $120. Suppose growth slows: EPS rises 20% to $2.40, but the market now pays a P/E of 30. New price: $2.40 × 30 = $72, i.e. 40% below $120 — even though earnings grew. This "multiple compression" is the main risk of growth stocks.
Mistakes and tips
Strong growth may already be priced in — a great company is not always a great investment.
Don't put a large share of the portfolio in one name: 30–50% drawdowns are common in growth stocks.
Check the quality of growth: are margins and cash flow improving along with revenue?
Frequently asked questions
- What is the difference between growth and value stocks?
- Growth stocks trade at high valuations for fast growth; value stocks grow slowly and are cheaper relative to earnings. Their risk and return profiles differ.
- Do growth stocks pay dividends?
- Most pay none or very little, because they spend the cash on expanding the business.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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