Glossary
Growth stock
A share in a company expected to grow revenue and earnings faster than average, usually priced at high valuation multiples.
On this page
A growth stock is a share in a company whose revenue and earnings are expected to grow considerably faster than the overall market's. Investors buy it chiefly for future expansion rather than for current profits or dividends, so it usually trades at high multiples of earnings, sales or book value. "Growth" is one half of the classic style divide; its counterpart is the value stock.
How it is identified
There is no single test. Index providers such as FTSE Russell and S&P classify stocks into growth and value using measures like historical and forecast earnings growth, sales growth and price-to-book ratios. Analysts look at similar signals: revenue growth well into double digits, reinvestment of most cash flow, little or no dividend, and a large addressable market.
Risks and behavior
- Rate sensitivity. Much of a growth stock's value lies in profits far in the future, so higher interest rates, which raise discount rates, tend to hit them harder. US growth indexes fell much more than value indexes in 2022 as rates rose.
- Expectation risk. When growth slows, the multiple can compress at the same time earnings disappoint, a double hit.
- Leadership shifts. Growth and value have taken turns outperforming for long stretches; neither wins permanently.
The PEG ratio is one simple tool for relating a growth stock's multiple to its expected growth.