What is the Growth Industry
A growth industry is the sector of the economy experiencing a higher-than-average growth rate. Growth industries are often associated with new or pioneer industries that did not exist in the past. Their growth is related to consumer demand for new products or services that firms within the industry are beginning to offer.
BREAKING DOWN Growth Industry
Examples of growth industries so far in 2018 include virtual reality (VR), medical marijuana, green or sustainable energy sources, drones, mobile technology, biotechnology and content marketing.
Virtual reality is an immersive, computer-generated scenario that can simulate a real-life experience; many consumers purchase VR headsets for gaming. Medical marijuana has become increasingly popular with the legalization of this formerly illegal plant-based drug. Green energy includes the manufacturing and installation of solar panels, for example.
Mobile technology incorporates all of the apps that users rely on with their smartphones. Biotechnology continues to push the boundaries of drug development, and content marketing is the development of long-form, at times research-intensive blog posts that companies can use to serve and attract customers to their product and/or service.
Characteristics of Growth Industries
Particular characteristics of growth industries include companies across an industry exhibiting consistent and quickly growing sales figures and an influx of investments. This can often be accompanied by a lot of press hype. Growth industries tend to be composed of relatively volatile and risky stocks. Often investors are willing to accept increased risk in order to take part in the potentially large gains.
Additional risks that growth industries pose can include high rates of cash burn, lack of profitability despite consumer and investor excitement, bubbles, and technological setbacks that can obstruct progress.
Growth Industry and CAGR
Many analysts use the compound annual growth rate (CAGR) when determining the present viability and future potential of an investment. The CAGR is the mean annual growth rate of an investment over a set period of time longer than one year and can apply to companies in both growth and regular industries.
To calculate compound annual growth rate, analysts divide the value of an investment at the end of the period by its value at the beginning of the period. The analyst then raises the result to the power of one, divided by the period length, and subtract one from the subsequent result:
CAGR is widely used to calculate the average growth of an investment. An investment may increase in value by 6% in one year, decrease in value by 3% the following year and increase again by 2% in the next. With inconsistent annual growth, CAGR may be used to give a broader picture of an investment’s progress; however, it doesn’t take into account external factors such as market volatility.