Growth Company

What is a 'Growth Company'

A growth company is any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to put most or all of its profits back into its expanding business.

BREAKING DOWN 'Growth Company'

Growth companies are most often seen in the technology industries. The quintessential example of a growth company is Google, which has grown revenues, cash flows and earnings by leaps and bounds since its initial public offering (IPO). Growth companies such as Google are expected to increase profits markedly in the future, and thus the market bids up their share prices to high valuations. This contrasts with mature companies, such as utility companies, which see very stable earnings with little to no growth.

Growth companies create value by continuing to expand above-average earnings, free cash flow, and research and development spending. Growth investors are less worried about the dividend growth, high price-to-earnings ratios and high price-to-book ratios that growth companies face, because of the vast focus on sales growth and maintaining industry leadership. Overall, growth stocks pay lower dividends than value stocks because of the focus to reinvest profits in the business to help continue driving earnings growth.

Bull Markets Are Ideal Conditions for Growth Companies

During bull markets, growth stocks are preferred and tend to outperform value stocks because of the “risk on” environment and the perceived low risk in the markets. However, growth stocks tend to underperform value stocks during bear markets, as weak economic activity hinders sales growth and the growth engine driving the stocks higher.

Classic Growth Stocks: Google, Tesla and Amazon

The vast majority of growth companies reside in the technology sector, where rapid innovation and growth spending is commonplace. Google, Tesla and Amazon are three classic examples of growth companies because they continue to focus on innovative technologies, sales growth and expansion into new businesses, and heavily invest in their businesses.

While these three growth stocks have more expensive valuations than the S&P 500, Google, Tesla and Amazon are also the leaders in their respective niche industries. Google is continuing its technology conglomerate-status by expanding into new technologies such as artificial intelligence. Tesla is the popular electric car maker and undisputed leader of the emerging industry. Meanwhile, Amazon continues to disrupt the retail sector as it takes business away from traditional brick-and-mortar retail competitors.

RELATED TERMS
  1. Growth Stock

    Shares in a company whose earnings are expected to grow at an ...
  2. Growth Investing

    A strategy whereby an investor seeks out stocks with what they ...
  3. Growth Rates

    The amount of increase that a specific variable has gained within ...
  4. Growth Firm

    A company that is growing at a rapid pace compared to its peers ...
  5. Growth Fund

    A diversified portfolio of stocks that has capital appreciation ...
  6. Growth Industry

    A sector of the economy experiencing a higher-than-average growth ...
Related Articles
  1. Investing

    Benefits and Risk of Growth Stock

    A growth stock is a share in a company whose earnings and sales are growing faster than those of most other companies.
  2. Markets

    5 Characteristics of Good Growth Stocks

    Growth stocks can give investors good returns, but not all growth stocks are the same. From leadership to growth, there are traits good growth stocks share.
  3. Investing

    Growth Investing

    Growth investing is a strategy where an investor seeks out companies demonstrating signs of high earnings that are well above the average rate compared to other firms in their industry and within ...
  4. Managing Wealth

    Is Growth Always A Good Thing?

    Getting big quickly looks good, but companies can get into trouble when they do it too fast. Find out how to spot this trouble.
  5. Investing

    Growth Investing: 3 Tips to Consider

    Learn the basics of growth investing, and discover three tips for avoiding the risk of losing money while employing a growth investment strategy.
  6. Markets

    Great Company Or Growing Industry?

    Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
  7. Retirement

    Is Tesla Stock Suitable for Your IRA or Roth IRA? (TSLA)

    Find out Tesla's suitability for an IRA and whether it is a better investment for a traditional IRA or a Roth IRA; learn about speculation in TSLA valuation.
  8. Retirement

    Is Google Stock Suitable for Your IRA or Roth IRA?

    Discover if Google is an appropriate investment for an IRA and whether it is more appropriate for a traditional IRA or a Roth IRA.
  9. Markets

    Behind Google's 243% Rise in 10 years (GOOGL)

    Analyze Alphabet's stock price history to determine the primary drivers of appreciation. See how growth and outlook were more important than tech valuation.
  10. Insights

    3 Red Flags for Growth-Stage Companies (NFLX)

    Discover some of the warning signs that appear when a growth company begins exiting the growth phase, and learn how the company's stock is affected in this transitional stage.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. What level of annual growth is common for companies in the Internet sector?

    Learn what level of annual growth is common for companies in the Internet sector in terms of revenue growth and earnings ... Read Answer >>
  3. What is more important for a business, profitability or growth?

    Discover how both profitability and growth are important for a company, and learn how corporate profitability and growth ... Read Answer >>
  4. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ... Read Answer >>
  5. How does equity financing affect a company's financials compared with the effects ...

    Understand the formula used for calculating a company's sustainable growth rate and the factors that influence changes in ... Read Answer >>
  6. What is the incentive to buy a stock without dividends?

    While dividends are the only direct income (money paid out), the total return of holding, a stock is the dividend plus the ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center