What Are Growth Stocks and Are They Right for You?
To answer the question, “What are growth stocks?” let’s start with a couple of examples…
One of the leading growth stocks of the past 20 years is Amazon (Nasdaq: AMZN). Under the guidance of CEO Jeff Bezos, the e-commerce giant went years without turning a profit. Instead of wowing investors with increased profits during quarterly earnings calls, Amazon reinvested nearly every dime it made back into itself.
The strategy obviously proved fortuitous. Amazon now controls nearly 50% of all e-commerce. And as for investors that stuck with Amazon through the early stages… they’ve been handsomely rewarded with a massive increase in share price.
Another example of a growth stock is the cloud-based software company Salesforce (NYSE: CRM). This high-flying business has come a long way since its IPO back in 2004. And that’s due in part to following the growth model.
The San Francisco-based outfit was the first cloud computing company to reach $1 billion in annual revenue. Since doing so back in 2009, Salesforce has continued to break revenue records in its industry. And the stock price has followed suit.
From those humble beginnings, Salesforce has grown into a juggernaut with a market cap of more than $240 billion. Last year, the company reported revenue of $13.28 billion. That’s a massive 27% increase year over year. And in the last reported quarter, it collected $5.15 billion in quarterly revenue… which, in part, led to its entry in the Dow Jones Industrial Average.
Salesforce has leveraged all of this growth by building lucrative deals with the likes of AT&T (NYSE: T) and Workday (Nasdaq: WDAY)… which all but cements Salesforce’s leading presence in this growing industry.
What Are Growth Stocks and How to Find Them
To put it simply, growth stocks are shares of high-growth companies. They’re expected to increase revenue at an above average pace in their industries (or the market in general). And the better a company is at increasing its profits, the quicker share price should go up. That’s what can make them so appealing.
One drawback is that growth companies often forgo dividend payments in lieu of accelerating growth. But there are some exceptions to that rule. And dividend-paying growth stocks are out there.
But traditionally, there are three major characteristics to look for when trying to figure out whether something is a growth stock…
- A Good Record of Sales Growth
Look to earnings statements for this. If a company is consistently seeing growth in sales, in the double digits, there’s a good chance it qualifies as a growth stock. And the faster sales are growing, the faster the company’s stock value can rise.
But there are some limitations… You want to try to catch the trend early. If a company has seen five or more years of consistent sales growth, it can be less likely to see a big bounce in share price.
- Strong, Innovative Leadership
When a company is focused on growth, the management team plays a vital role. They need to maintain the company’s growth trajectory while continuing to innovate. This is a pivotal part of the equation if the company wants to stay ahead of the pack in its industry.
- It’s in a Growth Market
If you’re looking for the next growth stock, look to personal and societal trends. Take Netflix (Nasdaq: NFLX) for example. Back in 2000, Blockbuster Video had the chance to buy the video-delivery service for $50 million.
But at the time, it had only about 300,000 subscribers… and the founders were essentially laughed out of the room by the brass at Blockbuster.
When the company went public two years later, its subscriber base had doubled. And in 2004 and 2005, its subscriber base doubled again and again. With millions of subscribers, Netflix had captured the attention of much of America. But it still had lots of room to grow. And grow it did.
After introducing its streaming service in 2007, the company really hit its stride. And today it dominates the streaming video market with more than 180 million subscribers… in a market that didn’t even exist 15 years ago.
And that right there is a perfect example of a market with tons of growth potential. Millions of people were using Netflix. But even more are kicking themselves for not acting on the trend… and investing in Netflix before it grew to be worth more than $200 billion.
Still Looking for Growth?
To try to find the next big trend, look at your own spending habits. Chances are, if you’re spending money on or using a business now more than ever, you’re not alone. And it could be poised for a growth spurt.
Fewer people are using cash these days. Credit cards are easier and faster, and there are simply more rewards out there for users. So credit card companies and online payment processing companies could be poised to benefit from this trend.
Another example that’s been front and center for years but still has lots of growth potential is online advertising. Junk mail and robocalls aren’t gone yet. But targeted online advertising has certainly gained corporate America’s attention. And large corporations are leaning into it. Which means that companies that outclass the competition and are the best at reaching consumers could have a growth-filled few years to come.
The Bottom Line on Growth Stocks
Finding the next great investments that answer the question, “What are growth stocks?” is just one strategy used to make money in the stock market. But there are many different types of stocks out there. And they all have their share of advantages and disadvantages.
But if you’re keyed in on finding the next market mover with growth to spare, be sure to sign up for the Investment U e-letter below. Because the next big investment opportunity could be right around the corner. And we want you to know all about it.
Read Next: Investing in Growth Stocks
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dog, Dorito.